Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.

If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o

If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o

If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier registration statement for the same
offering. o

If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier registration statement for the same
offering. o

CALCULATION
OF REGISTRATION FEE

Proposed Maximum

Proposed Maximum

Amount of

Title of Each Class of

Amount

Offering

Aggregate

Registration

Securities to be Registered

to be Registered(1)

Price per Share(2)

Offering Price(2)

Fee(3)

Class A Common Stock, $0.01 par
value per share

4,312,500 shares

$

16.00

$

69,000,000

$

2,118

(1)

Includes 562,500 shares that the underwriters have the option to
purchase to cover over-allotments, if any.

(2)

Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933, as
amended.

(3)

Previously paid.

The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.

The information in
this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and is not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.

PRELIMINARY PROSPECTUS (Subject to
Completion)

Dated July 17, 2007

3,750,000 Shares

Class A Common
Stock

This is an initial public offering of shares of our class A
common stock. We are offering 3,125,000 shares and a selling
stockholder is offering 625,000 shares of our class A
common stock. We will not receive any proceeds from the sale of
shares by the selling stockholders. Prior to this offering,
there has been no public market for our class A common
stock. We have applied for quotation of our class A common
stock on The NASDAQ Global Market under the symbol
SCMP. We expect that the public offering price will
be between $14.00 and $16.00 per share.

Our business and an investment in our class A common
stock involve significant risks. These risks are described under
the caption Risk Factors beginning on page 8 of this
prospectus.

Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.

Per Share

Total

Public offering price

$

$

Underwriting discounts and
commissions

$

$

Proceeds, before expenses, to
Sucampo Pharmaceuticals, Inc.

$

$

Proceeds, before expenses, to
selling stockholders

$

$

The underwriters may also purchase up to an additional 562,500
shares from one of the selling stockholders at the public
offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover overallotments.

The underwriters expect to deliver the shares against payment
on ,
2007.

Cowen and Company

CIBC World Markets

Leerink Swann &
Company

,
2007

You should rely only on the information contained in this
prospectus. We and the selling stockholders have not, and the
underwriters have not, authorized anyone to provide you with
information or information different from that contained in this
prospectus. We and the selling stockholders are offering to
sell, and seeking offers to buy, shares of our class A
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of shares of
our common stock. In this prospectus, unless otherwise stated or
the context otherwise requires, references to
Sucampo, we, us,
our and similar references refer to Sucampo
Pharmaceuticals, Inc. and its consolidated subsidiaries, Sucampo
Pharma Europe Ltd. and Sucampo Pharma, Ltd.

SUCAMPO®
and
AMITIZA®
are our registered trademarks and our logo is our trademark.
Each of the other trademarks, trade names or service marks
appearing in this prospectus belongs to its respective
holder.

For investors outside the United
States: Neither we nor any of the underwriters
have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where
action for that purpose is required, other than in the United
States. You are required to inform yourselves about and to
observe any restrictions relating to this offering and the
distribution of this prospectus.

This summary highlights information contained elsewhere in this
prospectus. This summary may not contain all of the information
that is important to you. Before investing in our class A
common stock, you should read this prospectus carefully in its
entirety, especially the risks of investing in our class A
common stock that we discuss under Risk Factors, and
our consolidated financial statements and related notes
beginning on
page F-1.

Sucampo
Pharmaceuticals, Inc.

Sucampo Pharmaceuticals, Inc. is an emerging pharmaceutical
company focused on the discovery, development and
commercialization of proprietary drugs based on prostones, a
class of compounds derived from functional fatty acids that
occur naturally in the human body. The therapeutic potential of
prostones was first identified by one of our founders,
Dr. Ryuji Ueno. We believe that most prostones function as
activators of cellular ion channels and, as a result, may be
effective at promoting fluid secretion and enhancing cell
protection, which may give them wide-ranging therapeutic
potential, particularly for age-related diseases. We are focused
on developing prostones with novel mechanisms of action for the
treatment of gastrointestinal, respiratory, vascular and central
nervous system diseases and disorders for which there are unmet
or underserved medical needs and significant commercial
potential.

AMITIZA

In January 2006, we received marketing approval from the
U.S. Food and Drug Administration, or FDA, for our first
product
AMITIZA®
(lubiprostone) for the treatment of chronic idiopathic
constipation in adults. AMITIZA is the only prescription product
for the treatment of chronic idiopathic constipation that has
been approved by the FDA for use by adults of all ages,
including those over 65 years of age, and that has
demonstrated effectiveness for use beyond 12 weeks. Studies
published in The American Journal of Gastroenterology
estimate that approximately 42 million people in the United
States suffer from constipation. Based on these studies, we
estimate that approximately 12 million people can be
characterized as suffering from chronic idiopathic constipation.

We also plan to pursue marketing approval for AMITIZA for
additional constipation-related gastrointestinal indications
with large, underserved markets. We recently completed two
pivotal Phase III clinical trials and a long-term safety
trial of AMITIZA for the treatment of irritable bowel syndrome
with constipation. Based on the results of these trials, we
submitted a supplement to our existing new drug application, or
NDA, for AMITIZA to the FDA in June 2007 seeking marketing
approval for AMITIZA for the treatment of this indication. In
addition, we plan to commence Phase III pivotal clinical
trials of AMITIZA for the treatment of opioid-induced bowel
dysfunction in the third quarter of 2007.

We are party to a collaboration and license agreement with
Takeda Pharmaceutical Company Limited, or Takeda, to jointly
develop and commercialize AMITIZA for chronic idiopathic
constipation, irritable bowel syndrome with constipation,
opioid-induced bowel dysfunction and other gastrointestinal
indications in the United States and Canada. We have the right
to co-promote AMITIZA along with Takeda in these markets.
We and Takeda initiated commercial sales of AMITIZA in the
United States for the treatment of chronic idiopathic
constipation in April 2006. Takeda is marketing AMITIZA broadly
to office-based specialty physicians and primary care
physicians. We are complementing Takedas marketing efforts
by promoting AMITIZA through a specialty sales force in the
institutional marketplace, including specialist physicians based
in academic medical centers and long-term care facilities. We
have performed all of the development activities with respect to
AMITIZA and Takeda has funded a portion of the cost for these
activities. We have retained the rights to develop and
commercialize AMITIZA outside the United States and Canada and
to develop and commercialize it in the United States and Canada
for indications other than gastrointestinal indications.

SPI-8811 (cobiprostone) for the treatment of ulcers induced by
non-steroidal anti-inflammatory drugs, or NSAIDs, portal
hypertension, non-alcoholic fatty liver disease, disorders
associated with cystic fibrosis and chronic obstructive
pulmonary disease. We have completed Phase I trials of
SPI-8811 for NSAID-induced ulcers and a Phase II trial in
patients with cystic fibrosis. We plan to commence a
Phase II clinical trial of SPI-8811 to treat NSAID-induced
ulcers in the third quarter of 2007, a Phase II proof of
concept study of SPI-8811 in patients with portal hypertension
in 2007, and a Phase II trial of SPI-8811 for
gastrointestinal disorders associated with cystic fibrosis by
the second quarter of 2008. This last Phase II trial is
different than the Phase II trial we have already completed
for cystic fibrosis. SPI-8811 is in the preclinical stage for
other indications.



SPI-017 for the treatment of peripheral arterial and vascular
disease and central nervous system disorders. Initially, we are
working on the development of an intravenous formulation of
SPI-017 for the treatment of peripheral arterial disease. We
also are developing an oral formulation of SPI-017 for the
treatment of Alzheimers disease. We plan to commence
Phase I clinical trials of the intravenous formulation of
SPI-017 and Phase I clinical trials of the oral formulation
in 2008.

Our
Strategy

Our goal is to become a leading pharmaceutical company focused
on discovering, developing and commercializing proprietary drugs
based on prostones to treat diseases and disorders for which
there are unmet or underserved medical needs and significant
commercial potential. Our strategy to achieve this objective
includes the following key elements:



Focus on the commercialization of AMITIZA in the United States
for the treatment of chronic idiopathic constipation in adults.



Develop AMITIZA for the treatment of additional indications and
discover, develop and commercialize other prostone product
candidates. We believe that our focus on prostones may offer
several potential advantages, including:



novel mechanisms of action;



wide-ranging therapeutic potential;



our discovery and development experience with prostones; and



patent protection.



Target large and underserved markets, with a particular focus on
treating indications in the elderly population.



Seek marketing approval for AMITIZA and our other product
candidates outside the United States.



Focus on our core discovery, clinical development and
commercialization activities.



Grow through strategic acquisitions and in-licensing
opportunities.

Related-Party
Arrangements

We hold an exclusive worldwide royalty-bearing license from
Sucampo AG, a Swiss patent-holding company, to develop and
commercialize AMITIZA and other prostone compounds covered by
patents and patent applications held by Sucampo AG. We are
obligated to assign to Sucampo AG all patentable improvements
that we make in the field of prostones, which Sucampo AG will in
turn license back to us on an exclusive basis. With respect to
any prostone compound other than AMITIZA, SPI-8811 and SPI-017,
if we have not performed preclinical testing and generated
specified pharmacological and toxicity data for such compound
during the period that ends on the later of June 30, 2011
or the date upon which our founders, Drs. Sachiko Kuno and
Ryuji Ueno, no longer control our company, then the commercial
rights to that compound will revert to Sucampo AG, subject to a
15-month
extension in the case of any compound that we designate as one
for which we intend in good faith to perform the required
testing within that extension period.

We are party to exclusive supply arrangements with R-Tech Ueno,
Ltd., or
R-Tech, a
Japanese pharmaceutical manufacturer, to provide us with
clinical and commercial supplies of AMITIZA and clinical
supplies of our product candidates SPI-8811 and SPI-017. These
arrangements include provisions requiring
R-Tech to
assist us in connection with applications for marketing approval
for these compounds in the United States and elsewhere,
including assistance with regulatory compliance for chemistry,
manufacturing and controls.

Our two founders, Dr. Kuno and Dr. Ueno, together,
directly or indirectly, own all of the stock of Sucampo AG and a
majority of the stock of R-Tech. Drs. Kuno and Ueno also
are controlling stockholders of our company and are married to
each other. Dr. Ueno is our chief executive officer and the
chairman of our board of directors and Dr. Kuno was, until
recently, also an executive officer and director of our company.

Recent
Developments

In June 2007, we submitted a supplement to our existing NDA for
AMITIZA to the FDA seeking marketing approval for AMITIZA for
the treatment of irritable bowel syndrome with constipation. As
a result of this filing, Takeda is required by the terms of our
collaboration agreement with them to make a $30.0 million
milestone payment to us. We expect to recognize the entire
amount of this payment as research and development revenue in
the quarter ended June 30, 2007. We will be obligated to pay
Sucampo AG $1.5 million, reflecting 5% of this
milestone payment. We expect to expense the entire amount of
this payment as milestone royalties to related parties in the
quarter ended June 30, 2007.

For the three months ended June 30, 2007, we estimate that our
product royalty revenues were approximately $9.5 million,
compared to $2.3 million for the three months ended
March 31, 2007, reflecting increased prescriptions for
AMITIZA to treat chronic idiopathic constipation. We estimate
that we will be obligated to pay Sucampo AG $1.7 million,
reflecting 3.2% of AMITIZA net sales for the quarter. We expect
to expense the entire amount of this payment as product
royalties to related parties in the quarter ended June 30,
2007.

In June 2007, the compensation committee of our board of
directors authorized a one-time stock and cash award to each of
Drs. Kuno and Ueno, which will be settled immediately
following this offering. These awards are described in more
detail under the caption Certain Relationships and Related
Party Transactions  Special Stock and Cash Awards to
Drs. Kuno and Ueno appearing elsewhere in this prospectus.
We also refer to these awards in this prospectus as the founders
make-whole awards. These awards will consist of a combination of
cash and shares of class A common stock and will be fully
vested. The overall value of these awards, as well as the number
of shares of class A common stock to be issued as the stock
component of the awards, will depend upon the public offering
price per share in this offering. Assuming a public offering
price of $15.00 per share, the midpoint of the price range set
forth on the cover of this prospectus, the aggregate value of
these awards would be $10.2 million, consisting of
$4.1 million in cash and 407,496 shares of class A
common stock. We expect to record general and administrative
expense equal to the aggregate value of these awards in our
financial statements for the quarter ended June 30, 2007.

Our Dual
Class Capital Structure

We have two classes of common stock authorized, class A
common stock and class B common stock. Holders of
class A common stock and class B common stock have
identical rights, except that holders of class A common
stock are entitled to one vote per share and holders of
class B common stock are entitled to ten votes per share on
all matters on which stockholders are entitled to vote.

Immediately following the closing of this offering, after giving
effect to the assumed issuance of 407,496 shares of
class A common stock in connection with the founders
make-whole awards, we will have outstanding
15,544,881 shares of class A common stock and
26,191,050 shares of class B common stock. The
class B common stock will represent approximately 94% of
the combined voting power of our outstanding common stock
immediately following this offering. All of the shares of
class B common stock are owned by S&R Technology
Holdings, LLC, an entity wholly owned and controlled by
Drs. Kuno and Ueno. As a result, Drs. Kuno and Ueno
will be able to control the outcome of all matters upon which
our stockholders vote, including the election of directors,
amendments to our certificate of incorporation and mergers or
other business combinations.

We will not be authorized to issue additional shares of
class B common stock after this offering except in limited
circumstances, such as a stock split of both classes of common
stock or a stock dividend made in respect of both classes of
common stock. Shares of class B common stock will
automatically be converted into shares of class A common
stock upon transfer, with limited exceptions for transfers to
family trusts. In addition, all remaining outstanding shares of
class B common stock will automatically be converted into
shares of class A common stock upon the death, legal
incompetence or retirement from our company of both
Drs. Kuno and Ueno or at such time as the number of
outstanding shares of class B common stock is less than 20%
of the number of outstanding shares of class A and
class B common stock together.

In this prospectus, we refer to our authorized class A
common stock and class B common stock together as our
common stock.

Risks
Associated With Our Business

Our business is subject to numerous risks, as more fully
described in the section entitled Risk Factors
immediately following this prospectus summary. Since our
formation, we have incurred significant operating losses and, as
of March 31, 2007, we had an accumulated deficit of
$22.9 million. We expect to incur additional losses and may
never achieve or maintain profitability. Our success depends on
the successful commercialization of AMITIZA for the treatment of
chronic idiopathic constipation in adults and other indications
for which we are developing this drug. We have limited
experience commercializing drug products. If we are not
successful in making the transition from a pre-commercial stage
company to a commercial company, our ability to become
profitable will be compromised. We are highly dependent upon the
continued service of Dr. Ueno, our chief executive and
chief scientific officer, and our other key executives. We
depend significantly upon our collaboration with Takeda, and the
successful commercialization of AMITIZA will depend to a large
degree upon the effectiveness of Takedas sales force. Our
agreement with Takeda provides that it may be terminated by
either party if we fail to receive marketing approval from the
FDA for AMITIZA for the treatment of irritable bowl syndrome
with constipation and if we and Takeda do not thereafter agree
on an alternative development and commercialization strategy. We
have no manufacturing capabilities and rely exclusively upon
R-Tech for the manufacture of AMITIZA and other prostone product
candidates. Our preclinical studies may not produce successful
results and our clinical trials may not demonstrate safety and
efficacy in humans, which could impair our ability to develop
additional indications for AMITIZA and to develop and
commercialize other product candidates.

Our
Corporate Information

We were incorporated under the laws of Delaware in December
1996. Our principal executive offices are located at 4520
East-West Highway, Suite 300, Bethesda, Maryland 20814, and
our telephone number is
(301) 961-3400.
In September 2006, we acquired all of the capital stock of two
affiliated European and Asian operating companies, Sucampo
Pharma Europe Ltd., or Sucampo Europe, and Sucampo Pharma, Ltd.,
or Sucampo Japan, that were previously under common control with
us. Sucampo Europe and Sucampo Japan are now wholly owned
subsidiaries of our company.

One vote for each share of class A common stock and ten
votes for each share of class B common stock on all matters
on which stockholders are entitled to vote.

Use of proceeds

We estimate that the net proceeds from this offering will be
approximately $38.6 million, assuming an initial public
offering price of $15.00 per share, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us. We expect to use these net proceeds to
fund: development activities for AMITIZA, SPI-8811 and SPI-017;
expansion of our sales and marketing function; additional
clinical trials and sales and marketing efforts by our European
and Asian operating subsidiaries; development of other prostone
compounds; and working capital, capital expenditures and other
general corporate purposes, which may include the acquisition or
in-license of complementary technologies, products or
businesses. See Use of Proceeds. We will not receive
any of the proceeds from the sale of shares of our class A
common stock by the selling stockholders.

Risk factors

See Risk Factors and the other information included
in this prospectus for a discussion of factors you should
carefully consider before deciding to invest in shares of our
class A common stock.

Proposed NASDAQ Global Market symbol

SCMP

The number of shares of our class A and class B common
stock to be outstanding after this offering is based on shares
outstanding as of June 30, 2007 and gives effect to the
assumed issuance of 407,496 shares of class A common
stock in connection with the founders make-whole awards,
assuming a public offering price of $15.00 per share, the
midpoint of the price range set forth on the cover of this
prospectus. The number of shares to be outstanding after this
offering excludes:



1,150,900 shares of our class A common stock issuable
upon the exercise of stock options outstanding as of
June 30, 2007 at a weighted average exercise price of
$8.29 per share; and



an aggregate of 12,750,000 shares of class A common
stock reserved for future issuance under our equity compensation
plans as of the completion of this offering.

Unless otherwise noted, all information in this prospectus:



assumes no exercise of the outstanding options described above;



assumes no exercise by the underwriters of their option to
purchase up to 562,500 shares of class A common stock
to cover over-allotments;



gives effect to an 8.5-for-1 stock split of our class A
common stock and our class B common stock in the form of a
stock dividend declared by our board of directors in July
2007; and



gives effect to the conversion of all outstanding shares of our
preferred stock into an aggregate of 3,213,000 shares of
class A common stock, which will occur automatically upon
the closing of this offering.

The following is a summary of our consolidated financial
information. You should read this information together with our
consolidated financial statements and the related notes
appearing at the end of this prospectus and the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this
prospectus.

In September 2006, we acquired all of the capital stock of
Sucampo Europe and Sucampo Japan. Accordingly, we have
presented our financial statements on a consolidated basis as a
merger of entities under common control for all periods
presented to reflect this transaction. The pro forma net income
per share amounts and the number of shares used in computing pro
forma per share amounts give effect to the conversion of our
convertible preferred stock into class A common stock.

our issuance and sale of 3,125,000 shares of class A
common stock in this offering at an assumed initial public
offering price of $15.00 per share, which is the midpoint
of the price range listed on the cover page of this prospectus,
after deducting estimated underwriting discounts and commissions
and offering expenses payable by us; and



our payment of $4.1 million in cash immediately following
this offering in connection with the founders make-whole awards,
assuming a public offering price of $15.00 per share.

As discussed in note 2 to our consolidated financial
statements, we have restated our consolidated financial
statements for the years ended December 31, 2004 and 2005
and the three months ended March 31, 2006 to correct for
revenue recognition errors.

Investing in our class A common stock involves a high
degree of risk. You should carefully consider the risks and
uncertainties described below together with all of the other
information included in this prospectus, including the
consolidated financial statements and related notes appearing at
the end of this prospectus, before deciding to invest in our
class A common stock. If any of the following risks
actually occur, they may materially harm our business,
prospects, financial condition and results of operations. In
this event, the market price of our class A common stock
could decline and you could lose part or all of your
investment.

Risks
Related to Our Limited Commercial Operations

We
have historically incurred significant losses and we might not
achieve or maintain operating profitability.

We initiated commercial sales of our first product, AMITIZA, for
the treatment of chronic idiopathic constipation in adults in
April 2006, and we first generated product royalty revenue
in the quarter ended June 30, 2006. Since our formation, we
have incurred significant operating losses and, as of
March 31, 2007, we had an accumulated deficit of
$22.9 million. Our net losses were $19.5 million in
2004 and $316,000 in 2005. Although we had net income of
$21.8 million in 2006 and $516,000 in the first quarter of
2007, this was primarily attributable to our receipt of
development milestone payments totaling $50.0 million in
2005 and 2006, which we are recognizing as revenue over the
development period, which we estimate will be completed by
June 2007. Our historical losses have resulted principally
from costs incurred in our research and development programs and
from our general and administrative expenses. We expect to
continue to incur significant and increasing expenses for at
least the next several years as we continue our research
activities and conduct development of, and seek regulatory
approvals for, additional indications for AMITIZA and for other
drug candidates. Under our collaboration agreement with Takeda,
Takeda reimbursed us for the first $30.0 million in
research and development expenses we incurred related to AMITIZA
for the treatment of chronic idiopathic constipation and
irritable bowel syndrome with constipation, and we are
responsible for the next $20.0 million. Takedas
reimbursement obligation covered substantially all of our
research and development expenses for AMITIZA through 2005, by
which time Takeda had satisfied its full $30.0 million
reimbursement obligation. Accordingly, the unreimbursed portion
of our research and development expenses increased significantly
in 2006 and the first quarter of 2007. Whether we are able to
achieve operating profitability in the future will depend upon
our ability to generate revenues that exceed our expenses.
Changes in market conditions, including the failure or approval
of competing products, may require us to incur more expenses or
change the timing of expenses such that we may incur unexpected
losses. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual
basis. If we are unable to achieve and maintain profitability,
the market value of our class A common stock will decline
and you could lose all or a part of your investment.

If we
are unable to successfully commercialize our first product,
AMITIZA, for the treatment of chronic idiopathic constipation in
adults or other indications for which we are developing this
drug, including irritable bowel syndrome with constipation, or
experience significant delays in doing so, our ability to
generate product-based revenues and achieve profitability will
be jeopardized.

In the near term, our ability to generate product-based revenues
will depend on the successful commercialization and continued
development of AMITIZA. We recorded our first product royalty
revenue from AMITIZA in the quarter ended June 30, 2006.
The commercial success of AMITIZA will depend on several
factors, including the following:



the effectiveness of Takedas sales force, as supplemented
by our internal specialty sales force, in marketing and selling
AMITIZA in the United States for the treatment of chronic
idiopathic constipation in adults;

the ability of
R-Tech,
which has the exclusive right to manufacture and supply AMITIZA,
or any substitute manufacturer to supply quantities sufficient
to meet market demand and at acceptable levels of quality and
price;



acceptance of the product within the medical community and by
third-party payors;



successful completion of clinical trials of AMITIZA for the
treatment of other constipation-related gastrointestinal
indications beyond chronic idiopathic constipation and irritable
bowel syndrome with constipation, and acceptance of the results
of these trials by regulatory authorities; and



receipt of marketing approvals from the FDA and similar foreign
regulatory authorities for the treatment of other indications,
including marketing approval in the United States for AMITIZA to
treat irritable bowel syndrome with constipation.

If we are not successful in commercializing AMITIZA for the
treatment of chronic idiopathic constipation or other
indications, or are significantly delayed in doing so, our
business will be materially harmed.

We
have limited experience commercializing drug products. If we are
not successful in making the transition from a pre-commercial
stage company to a commercial company, our ability to become
profitable will be compromised.

For most of our operating history, we have been a pre-commercial
stage company. We are in the process of transitioning to a
company capable of supporting commercial activities, and we may
not be successful in accomplishing this transition. Our
operations to date have been limited largely to organizing and
staffing our company, developing prostone technology,
undertaking preclinical and clinical trials of our product
candidates and coordinating the U.S. regulatory approval
process for AMITIZA for the treatment of chronic idiopathic
constipation in adults. To make the transition to a commercial
company, we will need to continue to develop internally, or
contract with third parties to provide us with, the capabilities
to manufacture a commercial scale product and to conduct the
sales and marketing activities necessary for successful product
commercialization. While we are currently utilizing R-Tech to
perform these manufacturing functions and Takeda to perform many
of these sales and marketing functions with respect to the sale
of AMITIZA in the United States, we may nevertheless encounter
unforeseen expenses, difficulties, complications and delays as
we establish these commercial functions for AMITIZA and for
other products for which we may receive regulatory marketing
approval. As we continue to develop and seek regulatory approval
of additional product candidates and additional indications for
AMITIZA, and to pursue regulatory approvals for AMITIZA and
other products outside the United States, it could be difficult
for us to obtain and devote the resources necessary to
successfully manage our commercialization efforts. If we are not
successful in completing our transition to a commercial company,
our ability to become profitable will be jeopardized and the
market price of our class A common stock is likely to
decline.

Risks
Related to Employees and Managing Growth

If we
are unable to retain our chief executive and chief scientific
officer and other key executives, we may not be able to
successfully develop and commercialize our products,
particularly in light of the recent resignation of our president
and chair of our board of directors.

We are highly dependent on Dr. Ryuji Ueno, our chief
executive officer and chief scientific officer, and the other
principal members of our executive and scientific teams,
including Ronald Kaiser, our chief financial officer, Mariam
Morris, our chief accounting officer, Brad Fackler, our
executive vice president of commercial operations, Gayle
Dolecek, our senior vice president of research and development,
Kei Tolliver, our vice president of business development and
company operations, and Charles Hrushka, our vice president of
marketing. The loss of the services of any of these persons
might impede the achievement of our product development and
commercialization objectives and it might be difficult to
recruit a replacement executive for any of their positions. We
have employment agreements with these executives, but these
agreements are terminable by the employees on short or no notice
at any time without penalty to the employee. We do not maintain
key-man life insurance on any of our executives.

Dr. Sachiko Kuno, who had been serving as our president and
chair of our board of directors, resigned as an executive
officer and director of our company effective May 31, 2007.
Although we expect that Dr. Kuno will continue to work for
our company as a part-time employee, many of her duties will
need to be assumed by our existing senior executives until we
are able to identify and hire one or more additional senior
executives to take her place. This could distract our senior
management from their existing responsibilities and compromise
our ability to effectively manage our company.

If we
fail to attract, retain and motivate qualified personnel, we may
not be able to pursue our product development and
commercialization programs.

Recruiting and retaining qualified scientific and commercial
personnel, including clinical development, regulatory, and
marketing and sales executives and field personnel, will be
critical to our success. If we fail to recruit and then retain
these personnel, our ability to pursue our clinical development
and product commercialization programs will be compromised. We
may not be able to attract and retain these personnel on
acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar
personnel. We also experience competition for the hiring of
scientific personnel from universities and research institutions.

We
expect to expand our development, regulatory, sales and
marketing, and finance and accounting capabilities, and as a
result, we may encounter difficulties in managing our growth,
which could disrupt our operations.

We expect to experience significant growth in the number of our
employees and the scope of our operations, particularly in the
areas of drug development, regulatory affairs, sales and
marketing and finance and accounting. To manage our anticipated
future growth, we must continue to implement and improve our
managerial, operational and financial systems, expand our
facilities, and continue to recruit and train additional
qualified personnel. Due to our limited resources, we may not be
able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The expansion
of our operations may lead to significant costs and may divert
our management and business development resources. The
challenges of managing our growth will become more significant
as we expand the operations of Sucampo Europe and Sucampo Japan.
Any inability to manage growth could delay the execution of our
business plans or disrupt our operations.

We
previously identified material weaknesses in our internal
control over financial reporting and those of Sucampo Europe and
Sucampo Japan. If we fail to achieve and maintain effective
internal control over financial reporting, we could face
difficulties in preparing timely and accurate financial reports,
which could lead to delisting of our class A common stock
from The NASDAQ Global Market, to which we have applied to have
our class A common stock approved for quotation, result in
a loss of investor confidence in our reported results and cause
the price of our class A common stock to
fall.

In connection with the acquisition of Sucampo Europe and Sucampo
Japan and our preparation of audited financial information for
those two entities for the year ended December 31, 2005, we
identified control deficiencies related to those entities that
constitute material weaknesses in the design and operation of
our internal controls over financial reporting.

In general, a material weakness is defined as a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
annual or interim financial statements will not be prevented or
detected. The material weaknesses we identified are as follows:



We did not maintain effective controls over the completeness and
accuracy of revenue recognition. Specifically, effective
controls were not designed and in place to adequately review
contracts for the accuracy and proper cut-off of revenue
recognition at Sucampo Europe and Sucampo Japan. This control
deficiency resulted in adjustments to the revenue and deferred
revenue accounts. Additionally, this control deficiency could
result in a misstatement of the revenue and deferred revenue
accounts that would result in a material misstatement to our
interim or annual financial statements that would not be
prevented or detected.

We did not maintain effective controls over the completeness and
accuracy of the accounting for debt instruments. Specifically,
effective controls were not designed and in place to adequately
review debt agreements of Sucampo Europe and Sucampo Japan for
the proper accounting implications, or to ensure appropriate
communication within our company regarding the existence of all
debt agreements. This control deficiency resulted in adjustments
to accounts payable, other liabilities and notes payable
accounts. Additionally, this control deficiency could result in
a misstatement of accounts payable, other liabilities and notes
payable accounts that would result in a material misstatement to
our interim or annual financial statements that would not be
prevented or detected.



We did not maintain effective controls over the preparation,
review and presentation of the financial information prepared in
accordance with U.S. generally accepted accounting principles
reflecting Sucampo Europe and Sucampo Japans operations.
Specifically, effective controls were not designed and in place
to adequately review, analyze and monitor these affiliates
financial information, nor did we have a standard reporting
format for these affiliates, accounting procedures and policies
manuals, formally documented controls and procedures or a formal
process to review and analyze financial information of these
affiliates. This control deficiency resulted in adjustments to
revenue, deferred revenue, accounts payable, other liabilities
and notes payable accounts, as well as the statement of cash
flows. Additionally, this control deficiency could result in a
misstatement in a number of our financial statement accounts,
including the statement of cash flows, resulting in a material
misstatement to our interim or annual financial statements that
would not be prevented or detected.

In connection with the restatement of our consolidated financial
statements as of and for the year ended December 31, 2005
for errors in our deferred tax assets and our accounting for
fully vested non-employee options granted, we identified
additional control deficiencies that constitute material
weaknesses in the design and operation of our internal controls
over financial reporting. In particular:



We did not maintain effective controls over the completeness,
accuracy and valuation of accounting for certain income tax
balances. Specifically, effective controls were not designed and
in place to periodically assess, at an appropriate level of
detail, the more likely than not criteria for
recognition of deferred tax assets. This control deficiency
resulted in adjustments to the deferred tax asset valuation
allowance and the income tax provision accounts, which resulted
in a restatement of our consolidated financial statements as of
and for the year ended December 31, 2005. Additionally,
this control deficiency could result in a misstatement of the
deferred tax asset valuation allowance and income tax provision
accounts that would result in a material misstatement to our
interim or annual financial statements that would not be
prevented or detected.



We did not maintain effective controls over the valuation and
accuracy of accounting for non-employee stock options.
Specifically, effective controls were not designed and in place
to value the options using the contractual term as opposed to an
expected term. This control deficiency resulted in adjustments
to the research and development expenses and additional paid-in
capital accounts and resulted in a restatement of our financial
statements as of and for the year ended December 31, 2005.
Additionally, this control deficiency could result in a
misstatement of operating expenses and additional paid-in
capital accounts that would result in a material misstatement to
our interim or annual financial statements that would not be
prevented or detected.

The remediation of one of these material weaknesses is ongoing
as described in Managements Discussion and Analysis
of Financial Condition and Results of Operations. We
cannot assure you that we will be able to remediate this
weakness.

If we are unable to remediate our remaining material weakness,
we may not be able to accurately and timely report our financial
position, results of operations or cash flows as a public
company. Becoming subject to the public reporting requirements
of the Securities Exchange Act of 1934, or the Exchange Act,
upon the completion of this offering will intensify the need for
us to report our financial position, results of operations and
cash flows on an accurate and timely basis. We may not be able
to prepare complete and accurate financial statements on a
timely basis, which could result in delays in our public filings
and ultimately

delisting of our class A common stock from its principal
trading market, which will be The NASDAQ Global Market if our
application to have our class A common stock approved for
quotation is approved.

The
requirements of being a public company may strain our resources
and distract management.

As a public company, we will incur significant legal,
accounting, corporate governance and other expenses that we did
not incur as a private company. We will be subject to the
requirements of the Exchange Act, the Sarbanes-Oxley Act of
2002, or Sarbanes-Oxley, The NASDAQ Global Market, to which we
have applied to have our class A common stock approved for
quotation, and other rules and regulations. These rules and
regulations may place a strain on our systems and resources. The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
financial condition. Sarbanes-Oxley requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. We
currently do not have an internal audit group. In order to
maintain and improve the effectiveness of our disclosure
controls and procedures and internal controls over financial
reporting, we will need to devote significant resources and
management oversight. As a result, managements attention
may be diverted from other business concerns. In addition, we
will need to hire additional accounting staff with appropriate
public company experience and technical accounting knowledge and
we cannot assure you that we will be able to do so in a timely
fashion.

These rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on
our board of directors or as executive officers. We are
currently evaluating and monitoring developments with respect to
these rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.

Risks
Related to Product Development and Commercialization

Commercial
rights to some prostone compounds will revert back to Sucampo AG
in the future unless we devote sufficient development resources
to those compounds during the next several years; if any of the
compounds that revert back to Sucampo AG subsequently become
valuable compounds, we will have lost the commercial rights to
those compounds and will not be able to develop or market them,
and the reverted compounds could ultimately compete with
compounds we are developing or marketing.

Sucampo AG has granted to us an exclusive worldwide license to
develop and commercialize products based upon Sucampo AGs
extensive portfolio of U.S. and foreign patents and patent
applications relating to prostone technology. To retain our
license rights to any prostone compounds other than AMITIZA,
SPI-8811 and
SPI-017, we
are required to perform preclinical testing over a specified
period on those compounds and to generate specified
pharmacological and toxicity data. The specified period ends on
the later of June 30, 2011 or the date upon which
Drs. Kuno and Ueno no longer control our company. Following
the end of the specified period, Sucampo AG can terminate our
license with respect to any compounds as to which we have not
performed the required testing, except for any compounds we
designate as compounds for which we intend in good faith to
perform the required testing within 15 months following the
expiration of the specified period. At the end of that
15-month
period, Sucampo AG may terminate our license as to any of the
designated compounds for which we have not performed the
required testing.

We will need to focus our development resources and funding on a
limited number of compounds during the specified period. The
decision whether to commit development resources to a particular
compound will require us to determine which compounds have the
greatest likelihood of commercial success. Dr. Ueno and his
staff will be primarily responsible for making these decisions
on our behalf. Dr. Ueno and his wife, Dr. Kuno,
indirectly own all the stock of Sucampo AG. In this
process, we will likely commit resources to some compounds that
do not prove to be commercially feasible and we may overlook
other compounds that later prove to have significant commercial
potential. If we do not identify and commit resources to one of
these valuable compounds, the commercial rights with respect to
the compound will eventually revert back to

Sucampo AG. After the reversion of these rights to Sucampo AG,
we will have no ability to develop or commercialize the
compound. Although Sucampo AG will be prohibited from developing
products that compete with our products prior to the end of the
specified period, thereafter they will be free to develop
competitive products. In addition, although Sucampo AG will be
prohibited from marketing products that compete with our
products for 24 months after the end of the specified
period, after that date Sucampo AG will be permitted to market
products, including products covered by the reverted license
rights, in competition with us.

If our
preclinical studies do not produce successful results or if our
clinical trials do not demonstrate safety and efficacy in
humans, our ability to develop additional indications for
AMITIZA and to develop and commercialize other product
candidates will be impaired.

Before obtaining regulatory approval for the sale of our product
candidates, we must conduct extensive preclinical tests and
clinical trials to demonstrate the safety and efficacy in humans
of our product candidates. Preclinical and clinical testing is
expensive, is difficult to design and implement, can take many
years to complete and is uncertain as to outcome. Success in
preclinical testing and early clinical trials does not ensure
that later clinical trials will be successful, and interim
results of a clinical trial do not necessarily predict final
results. A failure of one or more of our clinical trials can
occur at any stage of testing. We may experience numerous
unforeseen events during, or as a result of, preclinical testing
and the clinical trial process that could delay or prevent our
ability to receive regulatory approval or commercialize our
product candidates, including:



regulators or institutional review boards may not authorize us
to commence a clinical trial or conduct a clinical trial at a
prospective trial site;



our preclinical tests or clinical trials may produce negative or
inconclusive results, and as a result we may decide, or
regulators may require us, to conduct additional preclinical
testing or clinical trials or we may abandon projects that we
consider to be promising. For example, the efficacy results in
two of our Phase II trials of
SPI-8811,
specifically the trials for the treatment of non-alcoholic fatty
liver disease and for the treatment of symptoms associated with
cystic fibrosis, were inconclusive. Therefore, further clinical
testing will be required in connection with the development of
this compound for these indications;



design of or enrollment in our clinical trials may be slower
than we currently anticipate, resulting in significant delays,
or participants may drop out of our clinical trials at rates
that are higher than we currently anticipate;



we might have to suspend or terminate our clinical trials, or
perform additional trials, if we discover that the participating
patients are being exposed to unacceptable health risks;



regulators or institutional review boards may require that we
hold, suspend or terminate clinical research for various
reasons, including noncompliance with regulatory requirements;



the cost of our clinical trials may be greater than we currently
anticipate;



we might have difficulty obtaining sufficient quantities of the
product candidate being tested to complete our clinical trials;



any regulatory approval we ultimately obtain may be limited or
subject to restrictions or post-approval commitments that render
the product not commercially viable; and



the effects of our product candidates may not be the desired or
anticipated effects or may include undesirable side effects, or
the product candidates may have other unexpected
characteristics. For example, in preclinical tests of AMITIZA,
the drug demonstrated a potential to cause fetal loss in guinea
pigs and, as a result, its label includes cautionary language as
to its use by pregnant women.

If we are required to conduct additional clinical trials or
other testing of our product candidates beyond those that we
currently contemplate, if we are unable to successfully complete
our clinical trials or other testing or if the results of these
trials or tests are not positive or are only modestly positive,
we may:



be delayed in obtaining marketing approval for our product
candidates;



not be able to obtain marketing approval; or



obtain approval for indications that are not as broad as those
for which we apply.

Our product development costs will also increase if we
experience delays in testing or approvals. We do not know
whether our clinical trials will begin as planned, will need to
be restructured or will be completed on schedule, if at all.
Significant clinical trial delays also could allow our
competitors to bring products to market before we do and impair
our ability to commercialize our products or product candidates.

We are
required to conduct supplemental post-marketing clinical trials
of AMITIZA and we may elect to perform additional clinical
trials for other indications or in support of applications for
regulatory marketing approval in jurisdictions outside the
United States. These supplemental trials could be costly and
could result in findings inconsistent with or contrary to our
historic U.S. clinical trials.

In connection with our marketing approval for AMITIZA for the
treatment of chronic idiopathic constipation in adults, we
committed to the FDA to conduct post-marketing studies of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. In the future, we may
be required, or we may elect, to conduct additional clinical
trials of AMITIZA. In addition, if we seek marketing approval
from regulatory authorities in jurisdictions outside the United
States, such as the European Medicines Agency, or EMEA, they may
require us to submit data from supplemental clinical trials in
addition to data from the clinical trials that supported our
U.S. filings with the FDA. Any requirements to conduct
supplemental trials would add to the cost of developing our
product candidates. Additional or supplemental trials could also
produce findings that are inconsistent with the trial results we
have previously submitted to the FDA, in which case we would be
obligated to report those findings to the FDA. This could result
in new restrictions on AMITIZAs existing marketing
approval for chronic idiopathic constipation in adults or could
force us to stop selling AMITIZA altogether. Inconsistent trial
results could also lead to delays in obtaining marketing
approval in the United States for other indications for AMITIZA
or for other product candidates, could cause regulators to
impose restrictive conditions on marketing approvals and could
even make it impossible for us to obtain marketing approval. Any
of these results could materially impair our ability to generate
revenues and to achieve or maintain profitability.

If we
are unable to establish sales and marketing capabilities or
successfully use third parties to market and sell our products,
we may be unable to generate sufficient product revenues to
become profitable.

We currently have very limited sales and distribution
capabilities and little experience in marketing and selling
pharmaceutical products. To achieve commercial success for
AMITIZA and any other approved products, we must either develop
a sales and marketing organization or outsource these functions
to third parties. There are risks associated with either of
these alternatives. For example, developing a sales force is
expensive and time consuming and could delay any product launch.
If the commercial launch of a product for which we recruit a
sales force and establish marketing capabilities were delayed,
we would incur related expenses too early relative to the
product launch. This may be costly, and our investment would be
lost if we could not retain our sales and marketing personnel.

We have entered into a joint collaboration and license agreement
with Takeda for the commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.
Takeda will broadly market AMITIZA for the treatment of chronic
idiopathic constipation in adults and for other
constipation-related gastrointestinal indications, if approved,
to office-based specialty physicians and primary care physicians
in the United States. The Takeda sales force dedicated to
selling AMITIZA will be significantly larger than our contract
sales force, and we will therefore be heavily dependent on the
marketing and sales efforts of Takeda.

If our contract specialty sales force is not effective, or if
Takeda is less successful in selling AMITIZA than we anticipate,
our ability to generate revenues and achieve profitability will
be significantly compromised.

Prior to July 1, 2007, we utilized Ventiv Commercial
Services, LLC, or Ventiv, to provide us with a contract
specialty sales force to market AMITIZA to hospital-based
specialist physicians and long-term care facilities. We
terminated our agreement with Ventiv effective July 1, 2007
and we are in the process of internalizing a significant portion
of their sales staff as employees of our company. This
internalization effort may not succeed and our ability to
generate revenues and profits may be adversely affected.

We
face substantial competition which may result in others
discovering, developing or commercializing products earlier or
more successfully than we do.

The development and commercialization of pharmaceutical products
is highly competitive. We expect to face intense competition
with respect to AMITIZA and our other product candidates from
major pharmaceutical companies, specialty pharmaceutical
companies and biotechnology companies worldwide. Potential
competitors also include academic institutions, government
agencies, and other public and private research organizations
that conduct research, seek patent protection and establish
collaborative arrangements for research, development,
manufacturing and commercialization. Our competitors may develop
products that are safer, more effective, have fewer side
effects, are more convenient or are less costly than AMITIZA or
the other product candidates that we are developing or that
would render AMITIZA or our other product candidates obsolete or
uncompetitive. Our competitors may also obtain FDA or other
regulatory approval for their products more rapidly than we may
obtain approval for ours or achieve product commercialization
before we do. A competitive product might become more popular if
it is approved for sale over the counter. If any of our
competitors develops a product that is more effective, safer or
more convenient for patients, or is able to obtain FDA approval
for commercialization before we do, we may not be able to
achieve market acceptance for our products, which would impair
our ability to generate revenues and recover the substantial
developments costs we have incurred and will continue to incur.

There are currently approved therapies for the diseases and
conditions addressed by AMITIZA. For example,
Zelnorm®,
which is marketed by Novartis Pharmaceuticals Corporation, has
been approved both for the treatment of chronic idiopathic
constipation in adults under 65 years of age and for the
short-term treatment of irritable bowel syndrome with
constipation in women. In March 2007, Zelnorm was withdrawn
from the U.S. market by Novartis at the request of the FDA, but
continues to be sold in other countries and may be acquired for
use by individuals in the United States and in other markets.
Zelnorm may be
re-introduced
to the U.S. and other markets at a later date and the FDA has
indicated that it may allow Zelnorm to be prescribed to some
patients under a special program in the meantime. In addition,
the osmotic laxatives
MiraLaxtm
(polyethylene glycol 3350), which is marketed by Braintree
Laboratories, Inc., and lactulose, which is produced by
Solvay S.A., have each been approved for the short-term
treatment of occasional constipation. Miralax was recently
approved for sale as an over-the-counter treatment.

Several companies also are working to develop new drugs and
other therapies for these same diseases and conditions. Some of
these potential competitive drug products include:



Drugs targeting serotonin receptors for the treatment of
irritable bowel syndrome with constipation, such as Renzapride,
being developed by Alizyme plc and currently in Phase III
clinical trials, and DDP733, being developed by Dynogen
Pharmaceuticals, Inc. and currently in Phase II clinical trials;



Opioid antagonists such as methylnaltrexone, being developed by
Progenics Pharmaceuticals, Inc., for the treatment of
opioid-induced bowel dysfunction. Progenics and its partner
Wyeth Pharmaceuticals recently filed an NDA with the FDA for a
subcutaneous formulation of this drug for the treatment of
opioid-induced bowel dysfunction in patients receiving
palliative care; and



TD-5108, being developed by Theravance, Inc. for the treatment
of chronic constipation, and linaclotide, being developed by
Microbia, Inc. for the treatment of irritable bowel syndrome
with constipation, both of which have recently completed
phase II clinical trials.

Many patients are treated for chronic idiopathic constipation
with competing over-the-counter products that are sold for
occasional or infrequent use or for recurring use and that are
directly competitive with our products.

We face similar competition from approved therapies and
potential drug products for the diseases and conditions
addressed by SPI-8811 and SPI-017, and are likely to face
significant competition for any other product candidates we may
elect to develop in the future.

Many of our competitors may have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals, and marketing approved products
than we do. Smaller or early stage companies may also prove to
be significant competitors, particularly through collaborative
arrangements with large and established companies.

The
commercial success of AMITIZA and any other products that we may
develop will depend upon the degree of market acceptance by
physicians, patients, healthcare payors and others in the
medical community.

AMITIZA and any other products that we bring to the market may
not gain acceptance by physicians, patients, healthcare payors
and others in the medical community. If these products do not
achieve an adequate level of acceptance, we may not generate
sufficient product revenues to become profitable. The degree of
market acceptance of AMITIZA and any other products approved for
commercial sale will depend on a number of factors, including:



the prevalence and severity of any side effects. For example,
the most common side effects reported by participants in our
clinical trials of AMITIZA for the treatment of chronic
idiopathic constipation were nausea, which was reported by 31%
of trial participants, and diarrhea and headache, both of which
were reported by 13% of trial participants;



the efficacy and potential advantages over alternative
treatments;



the competitiveness of the pricing of our products;



the relative convenience and ease of administration of our
products compared with other alternatives;



the timing of the release of our products to the public compared
to alternative products or treatments;



the willingness of the target patient population to try new
therapies and of physicians to prescribe these therapies;



the strength of marketing and distribution support; and



the level of third-party coverage or reimbursement.

The recent withdrawal of Zelnorm from the U.S. market might
adversely affect market acceptance of AMITIZA. The FDA requested
that Novartis discontinue marketing Zelnorm based on a recently
identified finding of an increased risk of serious
cardiovascular adverse events associated with use of the drug.
Although the mechanism of action of AMITIZA is different from
that of Zelnorm, and although AMITIZA has not been associated
with serious adverse cardiovascular events, nonetheless the
withdrawal of Zelnorm may result in heightened concerns in the
minds of some patients or physicians about the safety of using
alternative treatments such as AMITIZA.

In addition, Adolor Corporation, the developer of an opioid
antagonist,
Entereg®
(alvimopan), for the treatment of opioid-induced bowel
dysfunction, recently announced that it was withdrawing its
protocol for an additional Phase III clinical trial of Entereg
to treat this condition, which had previously been filed with
the FDA. This decision was reportedly based upon preliminary
Phase III trial safety results that suggest potential links
between use of Entereg and adverse cardiovascular events, tumor
development and bone fractures. It is possible that this
development, coming so shortly after the withdrawal of Zelnorm,
could further confuse patients and physicians and lead to
reluctance on their part to use and to prescribe new drugs to
treat gastrointestinal conditions, even those with different
mechanisms of action such as AMITIZA.

If we
are unable to obtain adequate reimbursement from third-party
payors for AMITIZA and any other products that we may develop,
or acceptable prices for those products, our revenues and
prospects for profitability will suffer.

Our revenues and ability to become profitable will depend
heavily upon the availability of adequate reimbursement for the
use of our products from governmental and other third party
payors, both in the United States and in foreign markets.
Reimbursement by a third-party payor may depend upon a number of
factors, including the third-party payors determination
that use of a product is:



a covered benefit under its health plan;



safe, effective and medically necessary;



appropriate for the specific patient;



cost effective; and



neither experimental nor investigational.

Obtaining reimbursement approval for a product from each
government or other third-party payor is a time-consuming and
costly process that could require us to provide supporting
scientific, clinical and cost-effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to gain acceptance with respect to reimbursement.
Even when a payor determines that a product is eligible for
reimbursement, the payor may impose coverage limitations that
preclude payment for some product uses that are approved by the
FDA or comparable authorities. Moreover, eligibility for
coverage does not imply that any product will be reimbursed in
all cases or at a rate that allows us to make a profit or even
cover our costs. If we are not able to obtain coverage and
profitable reimbursement promptly from government-funded and
private third-party payors for our products, our ability to
generate revenues and become profitable will be compromised.

Recent
federal legislation will increase the pressure to reduce prices
of prescription drugs paid for by Medicare, which could limit
our ability to generate revenues.

In 2003, the United States government enacted legislation
providing a partial prescription drug benefit for Medicare
recipients, which became effective at the beginning of 2006.
Government payment for some of the costs of prescription drugs
may increase demand for any products for which we receive
marketing approval. However, to obtain payments under this
program, we will be required to sell products to Medicare
recipients through drug procurement organizations operating
pursuant to this legislation. These organizations will negotiate
prices for our products, which are likely to be lower than those
we might otherwise obtain. Federal, state and local governments
in the United States continue to consider legislation to limit
the growth of healthcare costs, including the cost of
prescription drugs. Future legislation could limit payments for
pharmaceuticals such as AMITIZA and the other product candidates
that we are developing.

Legislation
has been proposed from time to time that would permit
re-importation of drugs from foreign countries into the United
States, including foreign countries where the drugs are sold at
lower prices than in the United States, which could force us to
lower the prices at which we sell our products and impair our
ability to derive revenues from these products.

Legislation has been introduced from time to time in the
U.S. Congress that would permit more widespread
re-importation of drugs from foreign countries into the United
States. This could include re-importation from foreign countries
where the drugs are sold at lower prices than in the United
States. Such legislation, or similar regulatory changes, could
lead to a decrease in the price we receive for any approved
products, which, in turn, could impair our ability to generate
revenues. Alternatively, in response to legislation such as
this, we might elect not to seek approval for or market our
products in foreign jurisdictions in order to minimize the risk
of
re-importation,
which could also reduce the revenue we generate from our product
sales.

In some foreign countries, particularly Japan and the countries
of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take considerable time after the receipt of marketing
approval for a product. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of our
products to other available therapies. If reimbursement of our
products is unavailable in particular countries or limited in
scope or amount, or if pricing is set at unsatisfactory levels,
our ability to generate revenue and profitably distribute
products in these countries could be compromised.

If
product liability lawsuits are brought against us, we may incur
substantial liabilities and may be required to limit
commercialization of any products that we may
develop.

We face an inherent risk of product liability exposure, both
from the testing of our product candidates in human clinical
trials and from the sale of AMITIZA and any other drugs we may
sell in the future. If we cannot successfully defend ourselves
against claims that our products or product candidates caused
injuries, we will incur substantial liabilities. Regardless of
merit or eventual outcome, product liability claims may result
in:



decreased demand for AMITIZA or any other product that we may
develop;



injury to our reputation;



withdrawal of clinical trial participants;



costs to defend the related litigation;



substantial monetary awards to trial participants or patients;



loss of revenue; and



the inability to continue to commercialize AMITIZA or to
commercialize any other product that we may develop.

We currently have product liability insurance that covers our
clinical trials in adult patients and our commercial sales of
AMITIZA up to an annual aggregate limit of $20.0 million
and that covers our clinical trials of AMITIZA in pediatric
patients up to an annual aggregate limit of $5.0 million,
in each case subject to a per claim deductible. The amount or
scope of our product liability insurance may not be adequate to
cover all liabilities that we may incur. Insurance coverage is
increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost, and we may not be able to obtain
insurance coverage that will be adequate to cover any liability
that may arise. We may not have sufficient resources to pay for
any liabilities resulting from a claim beyond the limits of our
insurance coverage. If we cannot protect against product
liability claims, we or our collaborators may find it difficult
or impossible to commercialize our products.

Our
strategy of generating growth through acquisitions and
in-licenses may not be successful if we are not able to identify
suitable acquisition or licensing candidates, to negotiate the
terms of any such transaction or to successfully manage the
integration of any acquisition.

As part of our business strategy, we intend to pursue strategic
acquisitions and in-licensing opportunities with third parties
to complement our existing product pipeline. We have no
experience in completing acquisitions with third parties to date
and we may not be able to identify appropriate acquisition or
licensing candidates or to successfully negotiate the terms of
any such transaction. The licensing and acquisition of
pharmaceutical and biological products is a competitive area. A
number of more established companies are also pursuing
strategies to license or acquire products in the pharmaceutical
field, and they may have a competitive advantage over us due to
their size, cash resources and greater clinical development and
commercialization capabilities. If we are unable to successfully
complete acquisitions or in-licensing transactions for suitable
products and product candidates, our prospects for growth could
suffer.

Even if we are successful in completing one or more
acquisitions, the failure to adequately address the financial,
operational or legal risks of these transactions could harm our
business. To finance an acquisition, we could be required to use
our cash resources, issue potentially dilutive equity securities
or incur or assume debt or contingent liabilities. Accounting
for acquisitions can require impairment losses or restructuring
charges, large write-offs of in-process research and development
expense and ongoing amortization expenses related to other
intangible assets. In addition, integrating acquisitions can be
difficult, and could disrupt our business and divert management
resources. If we are unable to manage the integration of any
acquisitions successfully, our ability to develop new products
and continue to expand our product pipeline may be impaired.

We may
need substantial additional funding and be unable to raise
capital when needed, which could force us to delay, reduce or
abandon our commercialization efforts or product development
programs.

We expect to incur significant commercialization expenses for
product sales, marketing, manufacturing and distribution of
AMITIZA. In addition, we expect our research and development
expenses to increase in connection with our ongoing activities.
We may need substantial additional funding and be unable to
raise capital when needed or on attractive terms, which would
force us to delay, reduce or abandon our commercialization
efforts or development programs.

We have financed our operations and internal growth principally
through private placements of equity securities, payments
received under our collaboration agreement with Takeda and
milestone and other payments from Sucampo AG and R-Tech. We
believe that the net proceeds from this offering, together with
our existing cash and cash equivalents and internally generated
funds that we anticipate from AMITIZA product sales, will be
sufficient to enable us to fund our operating expenses for the
foreseeable future. Our future funding requirements, however,
will depend on many factors, including:



actual levels of AMITIZA product sales;



the cost of commercialization activities, including product
marketing, sales and distribution;



the scope and results of our research, preclinical and clinical
development activities;

the costs involved in obtaining and maintaining proprietary
protection for our products, technology and know-how, including
litigation costs and the results of such litigation;



our ability to recruit and retain internal staff resources to
conduct these activities;



the extent to which we acquire or invest in businesses, products
and technologies;



the success of our collaboration with Takeda; and



our ability to establish and maintain additional collaborations.

If we are required to raise additional funds from external
sources, we might accomplish this through public or private
equity offerings, debt financings or corporate collaboration and
licensing arrangements. If we raise additional funds by issuing
equity securities, you may experience dilution. The holders of
any new equity securities we issue may have rights, preferences
or privileges that are senior to yours. Debt financing, if
available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures
or declaring dividends. If we raise additional funds through
collaboration and licensing arrangements with third parties, it
may be necessary to relinquish valuable rights and related
intellectual property to our technologies, research programs,
products or product candidates.

Risks
Related to Our Dependence on Third Parties, Including Related
Parties

We
have no manufacturing capabilities and are dependent upon R-Tech
to manufacture and supply us with our product and product
candidates. If R-Tech does not manufacture AMITIZA or our other
product candidates in sufficient quantities, at acceptable
quality levels and at acceptable cost and if we are unable to
identify a suitable replacement manufacturer, our sales of
AMITIZA and our further clinical development and
commercialization of other products could be delayed, prevented
or impaired.

We do not own or operate manufacturing facilities and have
little experience in manufacturing pharmaceutical products. We
currently rely, and expect to continue to rely, exclusively on
R-Tech to
supply Takeda and us with AMITIZA,
SPI-8811 and
SPI-017 and
any future prostone compounds that we may determine to develop
or commercialize. We have granted
R-Tech the
exclusive right to manufacture and supply AMITIZA to meet our
commercial and clinical requirements in the Americas, Europe,
the Middle East and Africa until 2026, and we do not have an
alternative source of supply for AMITIZA in these or any other
territories. We also do not have an alternative source of supply
for SPI-8811
or SPI-017,
which R-Tech
manufactures and supplies to us. If
R-Tech is
not able to supply AMITIZA or these other compounds on a timely
basis, in sufficient quantities and at acceptable levels of
quality and price and if we are unable to identify a replacement
manufacturer to perform these functions on acceptable terms,
sales of AMITIZA would be significantly impaired and our
development programs could be seriously jeopardized. In
addition, we currently do not have a manufacture or supply
arrangement for the supply of AMITIZA in Asia. Our ability to
market and sell AMITIZA in Asia also would be significantly
impaired if we are unable to enter into a supply and manufacture
arrangement with R-Tech or another suitable manufacturer for the
supply of AMITIZA in that territory.

The risks of relying solely on
R-Tech for
the manufacture of our products include:



we rely solely on
R-Tech for
quality assurance and their continued compliance with
regulations relating to the manufacture of pharmaceuticals;



R-Techs
manufacturing capacity may not be sufficient to produce
commercial quantities of our product, or to keep up with
subsequent increases in the quantities necessary to meet
potentially growing demand;



R-Tech may
not have access to the capital necessary to expand its
manufacturing facilities in response to our needs;



in light of the complexity of the manufacturing process for
prostones, if
R-Tech were
to cease conducting business, or if its operations were to be
interrupted, it would be difficult and time consuming for us to
find a replacement supplier and the change would need to be
submitted to and approved by the FDA;



R-Tech has
substantial proprietary know-how relating to the manufacture of
prostones and, in the event we must find a replacement or
supplemental manufacturer or we elect to contract with another
manufacturer to supply us with products other than AMITIZA, we
would need to transfer this know-how to the new manufacturer, a
process that could be both time consuming and expensive to
complete;



R-Tech may
experience events, such as a fire or natural disaster, that
force it to stop or curtail production for an extended
period; and



R-Tech could
encounter significant increases in labor, capital or other costs
that would make it difficult for
R-Tech to
produce our products cost-effectively.

In addition, R-Tech currently uses one supplier for the primary
ingredient used in the manufacture of prostones. R-Tech could
experience delays in production should it become necessary to
switch its source of supply for this ingredient to another
supplier or to manufacture the ingredient itself.

Our current and anticipated future dependence upon
R-Tech for
the manufacture of our products and product candidates may
adversely affect our future revenues, our cost structure and our
ability to develop

product candidates and commercialize any approved products on a
timely and competitive basis. In addition, if
R-Tech
should cease to manufacture prostones for our clinical trials
for any reason, we likely would experience delays in advancing
these trials while we seek to identify and qualify replacement
suppliers. We may be unable to obtain replacement supplies on a
timely basis, on terms that are favorable to us or at all.

We and
R-Tech are
dependent upon a single contract manufacturer to complete the
final stage of manufacture of AMITIZA.

R-Tech has
subcontracted with a single contract manufacturer to encapsulate
the bulk form AMITIZA supplied by
R-Tech into
gelatin capsules and to package the final product for
distribution in the United States. If this subcontractor
experiences difficulties or delays in performing these services
for any reason, our ability to deliver adequate supplies of
finished product to physicians and patients will be impaired
during the period in which
R-Tech seeks
a replacement manufacturer, which could cause us to lose
revenues. In addition, any change in the party providing
encapsulation of AMITIZA would need to be approved by the FDA,
and any change in the party packaging the product would need to
be submitted to and reviewed by the FDA, which could increase
the time required to replace this subcontractor should that
become necessary.

R-Tech
and any other third-party manufacturer of our products and
product candidates are subject to significant regulations
governing manufacturing facilities and procedures.

R-Tech,R-Techs
subcontractors and suppliers and any other potential
manufacturer of our products or product candidates may not be
able to comply with the FDAs current good manufacturing
practice, or cGMP, regulations, other U.S. regulations or
similar regulatory requirements in force outside the United
States. These regulations govern manufacturing processes and
procedures and the implementation and operation of systems to
control and assure the quality of products approved for sale. In
addition, the FDA or other regulatory agencies outside the
United States may at any time audit or inspect a
manufacturing facility to ensure compliance with cGMP or similar
regulations. Our failure, or the failure of
R-Tech,R-Techs
subcontractors and suppliers or any other third-party
manufacturer we use, to comply with applicable manufacturing
regulations could result in sanctions being imposed on us,
including fines, injunctions, civil penalties, failure of
regulatory authorities to grant marketing approval of our
product candidates, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely
affect supplies of our products and product candidates.

If it were to become necessary for us to replace
R-Tech as
contract manufacturer of our product and product candidates, we
would compete with other products for access to appropriate
manufacturing facilities and the change would need to be
submitted to and approved by the FDA. Among manufacturers that
operate under cGMP regulations, there are a limited number that
would be both capable of manufacturing for us and willing to do
so.

We
depend significantly on our collaboration with Takeda, and may
depend in the future on collaborations with other third parties,
to develop and commercialize our product
candidates.

A key element of our business strategy is to collaborate where
appropriate with third parties, particularly leading
pharmaceutical companies, to develop, commercialize and market
our products and product candidates. We are currently party to a
16-year
joint collaboration and license agreement with Takeda for the
development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.

Our agreement with Takeda provides that it may be terminated by
either party if we fail to receive marketing approval from the
FDA for AMITIZA for the treatment of irritable bowel syndrome
with constipation and if we and Takeda do not thereafter agree
on an alternative development and commercialization strategy. If
Takeda were to terminate the agreement under these conditions,
we would likely realize significantly lower revenues from sales
of AMITIZA for the treatment of chronic idiopathic constipation
until we could find a replacement marketing organization or
develop our own, and our ability to continue our development
program for AMITIZA for other gastrointestinal indications could
be seriously compromised. In

addition, if we fail to receive marketing approval from the FDA
for this indication, we might not receive up to
$30.0 million of development milestone payments that Takeda
is obligated to pay us upon our achievement of future regulatory
milestones relating to AMITIZA. We also might not receive up to
$50.0 million of commercial milestone payments that Takeda
is obligated to pay us upon the achievement of specified targets
for annual net sales revenue from AMITIZA in the
United States and Canada.

The success of our collaboration arrangement will depend heavily
on the efforts and activities of Takeda. The risks that we face
in connection with this collaboration, and that we anticipate
being subject to in any future collaborations, include the
following:



our joint collaboration agreement with Takeda is, and any future
collaboration agreements that we may enter into are likely to
be, subject to termination under various circumstances;



Takeda and other future collaborators may develop and
commercialize, either alone or with others, products and
services that are similar to or competitive with the products
that are the subject of the collaboration with us;



Takeda and other future collaborators may underfund or not
commit sufficient resources to the testing, marketing,
distribution or other development of our products or may use
committed resources inefficiently;



Takeda and other future collaborators may not properly maintain
or defend our intellectual property rights or may utilize our
proprietary information in such a way as to invite litigation
that could jeopardize or invalidate our proprietary information
or expose us to potential liability; and



Takeda and other future collaborators may change the focus of
their development and commercialization efforts. Pharmaceutical
and biotechnology companies historically have re-evaluated their
priorities from time to time, including following mergers and
consolidations, which have been common in recent years in these
industries.

The ability of our products and product candidates to reach
their potential could be limited if Takeda or any other future
collaborators decrease or fail to increase spending relating to
such products, fail to dedicate sufficient resources to
promoting our products or change their business focus.

Because
we rely upon third parties to provide the sales representatives
marketing AMITIZA, we may face increased risks arising from
their misconduct or improper activities, which would harm our
business.

Because we will have only limited capacity to monitor the sales
efforts of Takedas sales force, we may be exposed to
increased risks arising from any misconduct or improper
activities of these sales representatives, including the
potential off-label promotion of our products or their failure
to adhere to standard requirements in connection with product
promotion. In addition, we will be exposed to similar risks
arising from our previous use of Ventivs employees to
market AMITIZA. Although we terminated our agreement with Ventiv
effective July 1, 2007, any misconduct or inappropriate
activities by Ventiv employees prior to termination could create
future liabilities for us, and any misconduct or inappropriate
activities might not come to light for an extended period after
the termination. Any such improper activities could hurt our
reputation, cause us to become subject to significant
liabilities and otherwise harm our business.

We may
not be successful in establishing additional collaborations,
which could compromise our ability to develop and commercialize
products.

If we are unable to reach new agreements with suitable
collaborators, we may fail to meet our business objectives for
the affected product or program. We face significant competition
in seeking appropriate collaborators. Moreover, these
collaboration arrangements are complex and time-consuming to
negotiate and document. We may not be successful in our efforts
to establish additional collaborations or other alternative
arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be as favorable to
us as we anticipate. Moreover, these collaborations or other
arrangements may not be successful.

We
rely on third parties to conduct our clinical trials and those
third parties may not perform satisfactorily or may fail to meet
established deadlines for the completion of these
trials.

We generally do not have the independent ability to conduct
clinical trials for our product candidates. We rely on third
parties, such as contract research organizations, clinical data
management organizations, medical institutions, and clinical
investigators, to perform this function. For example,
approximately 130 separate clinical investigators participated
in our trials for irritable bowel syndrome with constipation. We
use multiple contract research organizations to coordinate the
efforts of our clinical investigators and to accumulate the
results of our trials. Our reliance on these third parties for
clinical development activities reduces our control over these
activities. Furthermore, these third parties may also have
relationships with other entities, some of which may be our
competitors. If these third parties do not carry out their
contractual duties or meet expected deadlines, we will be
delayed in obtaining, or may not be able to obtain, regulatory
approvals for our product candidates and will be delayed in our
efforts to, or may not be able to, successfully commercialize
our product candidates.

In addition, we are responsible for ensuring that each of our
clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. The FDA
requires us to comply with standards, commonly referred to as
good clinical practices, for conducting and recording and
reporting the results of clinical trials to assure that data and
reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are
protected. Our reliance on third parties that we do not control
does not relieve us of these responsibilities and requirements.

Conflicts
of interest may arise between us and Sucampo AG or
R-Tech, and
these conflicts might ultimately be resolved in a manner
unfavorable to us.

Our founders, Dr. Sachiko Kuno and Dr. Ryuji Ueno,
together wholly own Sucampo AG and own a majority of the stock
of R-Tech.
Dr. Kuno and Dr. Ueno are married to each other.
Ownership interests of our founders in the stock of
R-Tech or
Sucampo AG, and Dr. Uenos service as a director and
executive officer of our company, could give rise to conflicts
of interest when faced with a decision that could favor the
interests of one of the affiliated companies over another. In
addition, conflicts of interest may arise with respect to
existing or possible future commercial arrangements between us
and R-Tech
or Sucampo AG in which the terms and conditions of the
arrangements are subject to negotiation or dispute. For example,
conflicts of interest could arise over matters such as:



disputes over the cost or quality of the manufacturing services
provided to us by
R-Tech with
respect to AMITIZA, SPI-8811 and SPI-017;



a decision whether to engage
R-Tech in
the future to manufacture and supply compounds other than
AMITIZA, SPI-8811 and SPI-017;



decisions as to which particular prostone compounds, other than
AMITIZA, SPI-8811 or SPI-017, we will commit sufficient
development efforts to so that commercial rights to those
compounds will not revert back to Sucampo AG at the end of the
specified period; or



business opportunities unrelated to prostones that may be
attractive both to us and to the other company.

If
United States or foreign tax authorities disagree with our
transfer pricing policies, we could become subject to
significant tax liabilities.

We are a member of an affiliated group of entities, including
Sucampo AG and
R-Tech, each
of which is directly or indirectly controlled by Drs. Kuno
and Ueno. We have had and will continue to have significant
commercial transactions with these entities. Furthermore, we
operate two foreign subsidiaries, Sucampo Japan and Sucampo
Europe. We expect to enter into commercial transactions with
each of these entities on an ongoing basis. As a result of these
transactions, we will be subject to complex transfer pricing
regulations in both the United States and the other countries in
which we and our affiliates operate. Transfer pricing
regulations generally require that, for tax purposes,
transactions between our subsidiaries and affiliates and us

be priced on a basis that would be comparable to an arms
length transaction and that contemporaneous documentation be
maintained to support the related party agreements. To the
extent that United States or any foreign tax authorities
disagree with our transfer pricing policies, we could become
subject to significant tax liabilities and penalties related to
prior, existing and future related party agreements.

Risks
Related to Our Intellectual Property

If we
are unable to obtain and maintain proprietary protection for the
intellectual property relating to our technology and products,
the value of our technology and products will be adversely
affected and our ability to derive revenue from our products
would be impaired.

Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our intellectual property will depend on our success, in
conjunction with Sucampo AG, in obtaining effective claims and
enforcing those claims once granted. The scope of protection
afforded by a set of patent claims is subject to inherent
uncertainty unless the patent has already been litigated and a
court has ruled on the meaning of the claim language and other
issues affecting how broadly a patent claim can be enforced. In
some cases, we license patent applications from Sucampo AG
instead of issued patents, and we do not know whether these
patent applications will result in the issuance of any patents.
Our licensed patents may be challenged, invalidated or
circumvented, which could limit the term of patent protection
for our products or diminish our ability to stop competitors
from marketing related products. In addition, changes in either
patent laws or in interpretations of patent laws in the United
States and other countries may diminish the value of Sucampo
AGs patents and our intellectual property or narrow the
scope of the protection provided by these patents. Accordingly,
we cannot determine the degree of future protection for our
proprietary rights in the licensed patents and patent
applications. Furthermore, because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
product candidates can be commercialized, a related patent may
expire or may remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.

The patents we license from Sucampo AG also may not afford us
protection against competitors with similar technology. Because
patent applications in the United States and many foreign
jurisdictions are typically not published until 18 months
after filing, or in some cases not at all, and because
publications of discoveries in the scientific literature often
lag behind actual discoveries, neither we nor our Sucampo AG can
be certain that we or they were the first to make the inventions
claimed in issued patents or pending patent applications, or
that we or they were the first to file for protection of the
inventions set forth in these patent applications.

Confidentiality
agreements with our employees and other precautions may not be
adequate to prevent disclosure of our proprietary information
and know-how.

In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how developed both by
Sucampo AG and by us. We and Sucampo AG seek to protect our
respective proprietary technology and processes, in part, by
confidentiality agreements with our respective employees,
consultants, scientific advisors and contractors. We also seek
to preserve the integrity and confidentiality of our data and
trade secrets by maintaining physical security of our premises
and physical and electronic security of our information
technology systems. These agreements or security measures may be
breached, and we and Sucampo AG may not have adequate remedies
for any such breach. In addition, our trade secrets may
otherwise become known or be independently developed by
competitors. If we or Sucampo AG are unable to protect the
confidentiality of our proprietary information and know-how,
competitors may be able to use this information to develop
products that compete with our products, which could compromise
our ability to produce revenue and achieve profitability.

If we
infringe or are alleged to infringe intellectual property rights
of third parties, our business could be harmed.

There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the
pharmaceutical and biotechnology industries. Our research,
development and commercialization activities and those of
Sucampo AG, as well as any products or product candidates
resulting from these activities, may infringe or be alleged to
infringe patents or patent applications owned or controlled by
other parties. These third parties could bring claims against us
or one of our collaborators that would require us to incur
substantial expenses and, if successful against us, could cause
us to pay substantial damages. Further, if a patent infringement
suit were brought against us or one of our collaborators, we or
they could be forced to stop or delay research, development,
manufacturing or sales of the product or product candidate that
is the subject of the suit.

As a result of patent infringement claims, or in order to avoid
potential claims, we or one of our collaborators may choose or
be required to seek a license from a third party and be required
to pay license fees or royalties or both. These licenses may not
be available on acceptable terms, or at all. Even if we or a
collaborator were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining
access to the same intellectual property. Ultimately, we could
be prevented from commercializing a product, or be forced to
cease some aspect of our business operations, if, as a result of
actual or threatened patent infringement claims, we or one of
our collaborators are unable to enter into licenses on
acceptable terms. This could harm our business significantly.

We may
be subject to other patent related litigation or proceedings
that could be costly to defend and uncertain in their
outcome.

In addition to infringement claims against us, we may become a
party to other patent litigation and proceedings, including
interference proceedings declared by the United States Patent
and Trademark Office or opposition proceedings in the European
Patent Office regarding intellectual property rights with
respect to our products and technology, as well as other
disputes with licensees, licensors or others with whom we have
contractual or other business relationships for intellectual
property. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can because
of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of
patent litigation or other proceedings could negatively affect
our ability to compete in the marketplace. Patent litigation and
other proceedings may also absorb significant management
resources.

Risks
Related to Regulatory Approval and Oversight

If we
are not able to obtain required regulatory approvals, we will
not be able to commercialize our product candidates and our
ability to generate revenue will be materially
impaired.

Our product candidates and the activities associated with their
development and commercialization, including testing,
manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are
subject to comprehensive regulation by the FDA and other
regulatory agencies in the United States and by authorities in
other countries. Failure to obtain regulatory approval for a
product candidate will prevent us from commercializing the
product candidate.

Securing FDA approval requires the submission of extensive
preclinical and clinical data, information about product
manufacturing processes and inspection of facilities and
supporting information to the FDA for each therapeutic
indication to establish the product candidates safety and
efficacy. Our future products may not be effective, may be only
moderately effective or may prove to have undesirable side
effects, toxicities or other characteristics that may preclude
our obtaining regulatory approval or prevent or limit commercial
use.

The process of obtaining regulatory approvals is expensive,
often takes many years, if approval is obtained at all, and can
vary substantially based upon the type, complexity and novelty
of the product

candidates involved. Changes in the regulatory approval policy
during the development period, changes in or the enactment of
additional statutes or regulations, or changes in regulatory
review for each submitted product application, may cause delays
in the approval or rejection of an application. The FDA has
substantial discretion in the approval process and may refuse to
accept any application or may decide that our data are
insufficient for approval and require additional preclinical,
clinical or other studies. In addition, varying interpretations
of the data obtained from preclinical and clinical testing could
delay, limit or prevent regulatory approval of a product
candidate. Any regulatory approval we ultimately obtain may be
limited in scope or subject to restrictions or post-approval
commitments that render the product not commercially viable. If
any regulatory approval that we obtain is delayed or is limited,
we may decide not to commercialize the product candidate after
receiving the approval.

Even
if we receive regulatory approval for a product, the product
could be subject to regulatory restrictions or withdrawal from
the market, and we may be subject to penalties if we fail to
comply with ongoing regulatory requirements.

AMITIZA and any other product for which we obtain marketing
approval, along with the manufacturing processes, post-approval
clinical data, labeling, advertising and promotional activities
for such product, will be subject to continual requirements of
and review by the FDA and other regulatory bodies. These
requirements include submissions of safety and other
post-marketing information and reports, registration
requirements, cGMP requirements relating to quality control,
quality assurance and corresponding maintenance of records and
documents, requirements regarding the distribution of samples to
physicians and recordkeeping. Even if regulatory approval of a
product is granted, the approval may be subject to limitations
on the indicated uses for which the product may be marketed or
to the conditions of approval, or contain requirements for
costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. If we fail to comply with
applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.

We may
experience unanticipated safety issues with our products after
they are approved for marketing, which could harm our business
and our reputation.

Because AMITIZA and our other product candidates are based on
newly discovered prostone technology with novel mechanisms of
action, there may be long-term safety risks associated with
these products that are not identifiable or well-understood at
early stages of development and commercialization. Later
discovery of previously unknown problems with our products,
manufacturers or manufacturing processes may result in:



restrictions on such products, manufacturers or manufacturing
processes;



warning letters;



withdrawal of the products from the market;



refusal to approve pending applications or supplements to
approved applications that we submit; and



voluntary or mandatory product recalls.

Because we rely on Takeda to provide a significant portion of
the sales force that is selling AMITIZA, we are dependent to
some degree on Takeda to promptly and properly report any safety
issues encountered in the field. If Takeda or their sales
representatives fail to provide timely and accurate reporting of
any safety issues that arise in connection with AMITIZA, our
business and reputation could be harmed.

Failure
to obtain regulatory approval in international jurisdictions
would prevent us from marketing our products outside the United
States and could adversely affect our reputation and our product
marketing activities within the United States.

We intend to market our products both domestically and outside
the United States. In order to market our products in the
European Union, Japan and many other foreign jurisdictions, we
must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. The approval
procedure

varies among countries and can involve additional testing. The
time required to obtain approval may differ from that required
to obtain FDA approval. The foreign regulatory approval process
may include all of the risks associated with obtaining FDA
approval. We may not obtain foreign regulatory approvals on a
timely basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries or
jurisdictions, and approval by one foreign regulatory authority
does not ensure approval by regulatory authorities in other
foreign countries or jurisdictions or by the FDA. We may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.

We may
not be able to obtain orphan drug exclusivity for our product
candidates. If our competitors are able to obtain orphan drug
exclusivity for a product that is competitive with one or more
of our product candidates and we cannot show that our product
candidate is clinically superior, we may not be able to have
competing products approved by the applicable regulatory
authority for a significant period of time.

Regulatory authorities in some jurisdictions, including Europe
and the United States, may designate drugs that target
relatively small patient populations as orphan drugs. We have
received an orphan drug designation from the FDA for our product
candidate
SPI-8811 for
the treatment of disorders associated with cystic fibrosis and
we may pursue orphan drug designation for additional product
candidates. Generally, if a product with an orphan drug
designation subsequently receives the first marketing approval
for the indication for which it has such designation, the
product is entitled to a period of marketing exclusivity. The
exclusivity applies only to the indication for which the drug
has been designated and approved. The applicable exclusivity
period is seven years in the United States, but this period may
be interrupted if a sponsor of a competitive product that is
otherwise the same drug for the same use can show that its drug
is clinically superior to our orphan drug candidate. The
European exclusivity period is ten years, but may be reduced to
six years if a drug no longer meets the criteria for orphan drug
designation, including where it is shown that the drug is
sufficiently profitable so that market exclusivity is no longer
justified. In addition, European regulations establish that a
competitors marketing authorization for a similar product
with the same indication may be granted if there is an
insufficient supply of the product or if another applicant can
establish that its product is safer, more effective or otherwise
clinically superior. If a competitor obtains orphan drug
exclusivity for a product competitive with SPI-8811 before we do
and if the competitors product is the same drug with the
same indication as ours, we would be excluded from the market,
unless we can show that our drug is safer, more effective or
otherwise clinically superior. Even if we obtain orphan drug
exclusivity for
SPI-8811 for
these indications, we may not be able to maintain it if a
competitor with a product that is otherwise the same drug can
establish that its product is clinically superior.

We
must comply with federal, state and foreign laws, regulations,
and other rules relating to the health care business, and, if we
are unable to fully comply with such laws, regulations and other
rules, we could face substantial penalties.

We are or will be directly, or indirectly through our customers,
subject to extensive regulation by the federal government, the
states and foreign countries in which we may conduct our
business. The laws that directly or indirectly affect our
ability to operate our business include the following:



the federal Medicare and Medicaid Anti-Kickback law, which
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of
an individual, or furnishing or arranging for a good or service,
for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;



other Medicare laws, regulations, rules, manual provisions and
policies that prescribe the requirements for coverage and
payment for services performed by our customers, including the
amount of such payment;



the federal False Claims Act, which imposes civil and criminal
liability on individuals and entities who submit, or cause to be
submitted, false or fraudulent claims for payment to the
government;

the federal False Statements Act, which prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false statement in connection with the
delivery of or payment for healthcare benefits, items or
services; and



state and foreign law equivalents of the foregoing and state
laws regarding pharmaceutical company marketing compliance,
reporting and disclosure obligations.

If our operations are found to be in violation of any of the
laws, regulations, rules or policies described above or any
other law or governmental regulation to which we or our
customers are or will be subject, or if the interpretation of
the foregoing changes, we may be subject to civil and criminal
penalties, damages, fines, exclusion from the Medicare and
Medicaid programs and the curtailment or restructuring of our
operations. Similarly, if our customers are found non-compliant
with applicable laws, they may be subject to sanctions, which
could also have a negative impact on us. Any penalties, damages,
fines, curtailment or restructuring of our operations would harm
our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is
increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and
their provisions may be open to a variety of interpretations.
Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur
significant legal expenses, divert management resources from the
operation of our business and damage our reputation.

Risks
Related to the Offering

After
this offering, our founders will maintain the ability to control
all matters submitted to stockholders for approval, which could
result in actions of which you or other stockholders do not
approve.

When this offering is completed, after giving effect to the
assumed issuance of 407,496 shares of class A common
stock in connection with the founders make-whole awards,
Dr. Sachiko Kuno, who was until recently an executive
officer and director of our company, and Dr. Ryuji Ueno,
our chief executive officer, chief scientific officer and a
director, will together beneficially own 2,432,748 shares
of class A common stock and 26,191,050 shares of
class B common stock, representing approximately 95% of the
combined voting power of our outstanding common stock. As a
result, Drs. Kuno and Ueno, who are married, acting by
themselves will be able to control the outcome of all matters
that our stockholders vote upon, including the election of
directors, amendments to our certificate of incorporation, and
mergers or other business combinations. The concentration of
ownership and voting power also may have the effect of delaying
or preventing a change in control of our company and could
prevent stockholders from receiving a premium over the market
price if a change in control is proposed.

Provisions
in our corporate charter documents and under Delaware law may
prevent or frustrate attempts by our stockholders to change our
management and hinder efforts to acquire a controlling interest
in us, and the market price of our class A common stock may
be lower as a result.

There are provisions in our certificate of incorporation and
by-laws that may make it difficult for a third party to acquire,
or attempt to acquire, control of our company, even if a change
in control was considered favorable by you and other
stockholders. For example, our board of directors has the
authority to issue up to 5,000,000 shares of preferred
stock. The board of directors can fix the price, rights,
preferences, privileges, and restrictions of the preferred stock
without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a
change in control transaction. As a result, the market price of
our class A common stock and the voting and other rights of
our stockholders may be adversely affected. An issuance of
shares of preferred stock may result in the loss of voting
control to other stockholders.

Our charter documents contain other provisions that could have
an anti-takeover effect, including:



the high-vote nature of our class B common stock;



following the conversion of all shares of class B common
stock into class A common stock, only one of our three
classes of directors will be elected each year;

following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
entitled to remove directors other than by a 75% vote and for
cause;



following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
permitted to take actions by written consent;



stockholders cannot call a special meeting of stockholders; and



stockholders must give advance notice to nominate directors or
submit proposals for consideration at stockholder meetings.

In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have
the effect of discouraging others from making tender offers for
our class A common stock. These provisions may also prevent
changes in our management.

If you
purchase shares of class A common stock in this offering,
you will suffer immediate dilution of your
investment.

We expect the initial public offering price of our class A
common stock to be substantially higher than the net tangible
book value per share of our class A common stock.
Therefore, if you purchase shares of our class A common
stock in this offering, you will pay a price per share that
substantially exceeds our pro forma net tangible book value per
share after this offering. To the extent outstanding options or
warrants are exercised, you will incur further dilution. Based
on an assumed initial public offering price of $15.00 per
share, the midpoint of the range set forth on the cover of this
prospectus, you will experience immediate dilution of
$13.35 per share, representing the difference between our
pro forma net tangible book value per share after giving effect
to this offering and the initial public offering price. In
addition, purchasers of class A common stock in this
offering will have contributed approximately 45.9% of the
aggregate price paid by all purchasers of our common stock but
will own only approximately 7.5% of our common stock outstanding
after this offering.

In addition, as of June 30, 2007, we had outstanding stock
options to purchase an aggregate of 1,150,900 shares of
class A common stock at a weighted average exercise price
of $8.29 per share. To the extent these outstanding options
are exercised, there will be further dilution to investors in
this offering.

An
active trading market for our class A common stock may not
develop.

Prior to this offering, there has been no public market for our
common stock. The initial public offering price for our
class A common stock will be determined through
negotiations with the underwriters and may bear no relationship
to the price at which the class A common stock will trade
upon completion of this offering. Although we have applied to
have our class A common stock quoted on The NASDAQ Global
Market, an active trading market for our shares may never
develop or be sustained following this offering. If an active
market for our class A common stock does not develop, it
may be difficult to sell shares you purchase in this offering
without depressing the market price for the shares or to sell
your shares at all.

Because
our stock price may be volatile, purchasers of our class A
common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in
general and the market for pharmaceutical and biotechnology
companies in particular have experienced extreme volatility that
has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors
may not be able to sell their class A common stock at or
above the initial public offering price. The market price for
our class A common stock may be influenced by many factors,
including:



failure of AMITIZA or other approved products, if any, to
achieve commercial success;



results of clinical trials of our product candidates or those of
our competitors;

variations in the financial results of companies that are
perceived to be similar to us;



changes in the structure of healthcare payment systems;



market conditions in the pharmaceutical and biotechnology
sectors and issuance of new or changed securities analysts
reports or recommendations; and



general economic, industry and market conditions.

We
have broad discretion in the use of the net proceeds from this
offering and may not use them effectively.

Our management will have broad discretion in the application of
the net proceeds from this offering and could spend the proceeds
in ways that do not improve our results of operations or enhance
the value of our class A common stock. The failure by our
management to apply these funds effectively could result in
financial losses, cause the price of our class A common
stock to decline and delay the development of our product
candidates. Pending their use, we may invest the net proceeds
from this offering in a manner that does not produce income or
that loses value.

We
have never paid cash dividends on our capital stock, and we do
not anticipate paying any cash dividends in the foreseeable
future.

We have paid no cash dividends on our capital stock to date. We
currently intend to retain our future earnings, if any, to fund
the development and growth of our business. In addition, the
terms of any existing or future debt agreements may preclude us
from paying dividends. As a result, capital appreciation, if
any, of our class A common stock will be your sole source
of gain for the foreseeable future.

A
significant portion of our total outstanding shares are eligible
to be sold into the market in the near future. This could cause
the market price of our class A common stock to drop
significantly, even if our business is doing well.

Sales of a substantial number of shares of our class A
common stock in the public market could occur at any time. If
our stockholders sell, or the market perceives that our
stockholders intend to sell, substantial amounts of our
class A common stock in the public market following this
offering, the market price of our class A common stock
could decline significantly. Upon completion of this offering,
after giving effect to the assumed issuance of
407,496 shares of class A common stock in connection
with the founders make-whole awards, we will have outstanding
41,735,931 shares of common stock, assuming no exercise of
outstanding options. Of these shares, the 3,750,000 shares
sold in this offering will be freely tradable and 37,578,436
additional shares of common stock will be available for sale in
the public market 180 days after the date of this
prospectus following the expiration of
lock-up
agreements between our stockholders and the underwriters. The
representatives of the underwriters may release these
stockholders from their
180-daylock-up
agreements with the underwriters at any time and without notice,
which would allow for earlier sales of shares in the public
market. Moreover, after this offering, holders of an aggregate
of 6,751,609 shares of our common stock will have rights,
subject to some conditions, to require us to file registration
statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other
stockholders. We also intend to register the
13,900,900 shares of class A common stock that we may
issue in the future under our equity compensation plans. Once we
register these shares, they can be freely sold in the public
market upon issuance, subject to the
180-daylock-up
agreements with our underwriters.

our plans for selling and marketing AMITIZA in the United States
for treatment of chronic idiopathic constipation in adults and
our plans to seek regulatory approval to market AMITIZA in
jurisdictions outside the United States;



our plans to develop other indications for AMITIZA;



our plans to develop SPI-8811 and SPI-017 and potentially other
compounds;



our collaborative arrangement with Takeda;



our ongoing and planned research programs and clinical trials;



the timing of and our ability to obtain and maintain regulatory
approvals;



the rate and degree of market acceptance and clinical utility of
our products;

our belief that the net proceeds from this offering, together
with our existing cash and cash equivalents and internally
generated funds from AMITIZA product sales, will be sufficient
to enable us to fund our operating expenses for the foreseeable
future.

We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this
prospectus, particularly in the Risk Factors
section, that we believe could cause actual results or events to
differ materially from the forward-looking statements that we
make. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make.

You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We do
not assume any obligation to update any forward-looking
statements.

We estimate that the net proceeds from this offering will be
approximately $38.6 million, assuming an initial public
offering price of $15.00 per share, which is the midpoint
of the price range listed on the cover page of this prospectus,
after deducting estimated underwriting discounts and commissions
and offering expenses payable by us. A $1.00 increase or
decrease in the assumed initial public offering price of
$15.00 per share would increase or decrease the net
proceeds to us from this offering by $2.9 million, assuming
that the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same. We will not
receive any of the proceeds from the sale of shares of our
class A common stock in this offering by the selling
stockholders.

We expect to use the net proceeds from this offering as follows:



up to $1.0 million to fund our share of two post-marketing
studies of AMITIZA to evaluate its safety in patients with renal
impairment and patients with hepatic impairment;



approximately $18.0 million to fund development and
regulatory activities for SPI-8811 and SPI-017, which we expect
will enable us to complete at least the following development
efforts:



a Phase II clinical trial of SPI-8811 for the prevention and
treatment of NSAID-induced ulcers;



a Phase II proof-of-concept study of SPI-8811 in patients with
portal hypertension;



a Phase II clinical trial of SPI-8811 in patients with cystic
fibrosis; and



Phase I clinical trials of an intravenous formulation of SPI-017
for peripheral arterial and vascular disease and stroke;



up to $12.0 million to fund the expansion of our
commercialization activities in the United States and the
initiation of commercialization efforts in non-U.S. markets;



up to $1.0 million to fund regulatory efforts by Sucampo
Europe and Sucampo Japan for AMITIZA and
SPI-8811;



up to $6.0 million for research and development activities
for prostone compounds other than AMITIZA,
SPI-8811 and
SPI-017;



up to $1.0 million to fund costs in connection with
computers, software and information technology to support growth
in our business; and



any balance to fund working capital, capital expenditures and
other general corporate purposes, which may include the
acquisition or in-license of complementary technologies,
products or businesses.

This expected use of proceeds from this offering represents our
intentions based upon our current plans and business conditions.
The amounts and timing of our actual expenditures may vary
significantly depending upon numerous factors, including the
progress of our development and commercialization efforts, the
progress of our clinical trials and our operating costs and
capital expenditures. As a result, we will retain broad
discretion in the allocation of the net proceeds from this
offering. We have no current understandings, commitments or
agreements to acquire or in-license any technologies, products
or businesses.

Pending use of the proceeds from this offering, we intend to
invest the proceeds in short-term, investment-grade,
interest-bearing instruments.

We have never paid or declared any cash dividends on our common
stock. We currently intend to retain all available funds and any
future earnings to fund the growth and development of our
business, and we do not anticipate paying any cash dividends in
the foreseeable future.

The following table sets forth our cash and cash equivalents,
short-term investments and capitalization as of March 31,
2007:



on an actual basis;



on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of our preferred stock into an
aggregate of 3,213,000 shares of class A common stock
upon the closing of this offering and our issuance of
407,496 shares of class A common stock and our payment
of $4.1 million in cash immediately following this offering
in connection with the founders make-whole awards, assuming a
public offering price of $15.00 per share; and



on a pro forma as adjusted basis to give effect to the sale of
3,125,000 shares of class A common stock in this
offering at an assumed initial public offering price of
$15.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses payable by us.

You should read this table together with our consolidated
financial statements and the related notes appearing elsewhere
in this prospectus and Managements Discussion and
Analysis of Financial Condition and Results of Operations.

A $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share of class A common
stock would increase or decrease pro forma as adjusted cash and
cash equivalents and short-term investments by
$2.9 million, and increase or decrease pro forma as
adjusted additional paid-in capital, total stockholders
equity and total capitalization by a total of $2.9 million,
assuming that the number of shares of class A common stock
offered by us, as set forth on the cover page of this
prospectus, remains the same. The information discussed in this
paragraph is illustrative only and following the completion of
this offering will be adjusted based on the actual initial
public offering price and other terms of this offering
determined at pricing.

The number of shares in the table above excludes:



1,164,500 shares of our class A common stock issuable
upon the exercise of stock options at a weighted average
exercise price of $8.31 per share; and



an aggregate of 12,750,000 shares of class A common
stock reserved for future issuance under our equity compensation
plans as of the completion of this offering.

If you invest in our class A common stock, your interest
will be diluted immediately to the extent of the difference
between the public offering price per share of our class A
common stock and the pro forma as adjusted net tangible book
value per share of our common stock after this offering.

Our net tangible book value as of March 31, 2007 was
$34.4 million, or $0.98 per share of common stock. Net
tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of
shares of our common stock outstanding. On a pro forma basis,
after giving effect to the automatic conversion of all
outstanding shares of our convertible preferred stock into an
aggregate of 3,213,000 shares of class A common stock upon
the closing of this offering and our issuance of
407,496 shares of class A common stock and our payment
of $4.1 million in cash immediately following this offering in
connection with the founders make-whole awards, assuming a
public offering price of $15.00 per share, our net tangible book
value as of March 31, 2007 was $30.3 million, or $0.78
per share of common stock.

After giving effect to the issuance and sale of the
3,125,000 shares of class A common stock in this
offering, at an assumed initial public offering price of
$15.00 per share, less the estimated underwriting discounts
and commissions and offering expenses payable by us, our pro
forma as adjusted net tangible book value as of March 31,
2007 would have been $68.9 million, or $1.65 per share
of class A and class B common stock. This represents
an immediate increase in net tangible book value per share of
$0.87 to existing stockholders and immediate dilution of
$13.35 per share to new investors. Dilution per share to
new investors is determined by subtracting pro forma as adjusted
net tangible book value per share after this offering from the
initial public offering price per share paid by a new investor.
The following table illustrates the per share dilution without
giving effect to the over-allotment option granted to the
underwriters:

Assumed initial public offering
price per share of class A common stock

$

15.00

Actual net tangible book value per
share as of March 31, 2007

$

0.98

Decrease per share attributable to
conversion of preferred stock and founders make-whole awards

0.20

Pro forma net tangible book value
per share as of March 31, 2007

0.78

Increase per share attributable to
new investors

0.87

Pro forma as adjusted net tangible
book value per share after this offering

1.65

Dilution per share to new investors

$

13.35

A $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share of class A common
stock would increase or decrease the pro forma as adjusted net
tangible book value per share after this offering by
$0.07 per share and the dilution per share to new investors
in this offering by $0.93 per share, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same.

If the underwriters exercise their over-allotment option in
full, there would be no effect on our pro forma as adjusted net
tangible book value or book value per share. If any shares are
issued in connection with outstanding options, you will
experience further dilution.

The following table summarizes as of March 31, 2007, on the
pro forma basis described above, the number of shares of common
stock purchased from us, the total consideration paid and the
average price per share paid by the existing stockholders and by
new investors in this offering at an assumed initial public
offering price of $15.00 per share, which is the midpoint
of the price range listed on the cover page of this prospectus,
before deducting estimated underwriting discounts and
commissions and other expenses of this offering.

Total Class A and Class B Shares

Total Consideration

Average Price

Number

%

Amount

%

Per Share

Existing stockholders

38,610,931

92.5

%

$

55,273,011

54.1

%

$

1.43

New investors

3,125,000

7.5

46,875,000

45.9

15.00

Total

41,735,931

100.0

%

$

102,148,011

100.0

%

The sale by a selling stockholder of 625,000 shares of
class A common stock in this offering will cause:



the number of shares of common stock held by existing
stockholders to be 37,985,931, or approximately 91.0% of the
total number of shares of our common stock outstanding after
this offering; and



the number of shares held by new investors to be 3,750,000, or
approximately 9.0% of the total number of shares of our common
stock outstanding after this offering.

A $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share of class A common
stock would increase or decrease the total consideration paid by
new investors by $3.1 million, and increase or decrease the
percent of total consideration paid by new investors by 1.7
percentage points, assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same.

The table above is based on shares outstanding as of
March 31, 2007 and excludes:



1,164,500 shares of our class A common stock issuable
at that date upon the exercise of stock options at a weighted
average exercise price of $8.31 per share; and



an aggregate of 12,750,000 shares of class A common
stock reserved at that date for future issuance under our equity
compensation plans as of the completion of this offering.

If the underwriters over-allotment option is exercised in
full, the following will occur:



the number of shares of common stock held by existing
stockholders will decrease to 37,423,431, or approximately 89.7%
of the total number of shares of our common stock outstanding
after this offering; and



the number of shares held by new investors will be increased to
4,312,500, or approximately 10.3%, of the total number of shares
of our common stock outstanding after this offering.

You should read the following selected consolidated financial
data in conjunction with our consolidated financial statements
and the related notes appearing at the end of this prospectus
and the Managements Discussion and Analysis of
Financial Condition and Results of Operations section of
this prospectus. In September 2006, we acquired all of the
capital stock of Sucampo Europe and Sucampo Japan. Accordingly,
we have presented our financial statements on a consolidated
basis as a merger of entities under common control for all
periods presented to reflect this transaction. The pro forma net
income per share amounts and the number of shares used in
computing pro forma per share amounts give effect to the
conversion of our convertible preferred stock into class A
common stock. We have derived the following consolidated
financial data as of December 31, 2005 and 2006 and for the
four years ended December 31, 2006 from consolidated
financial statements audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm. Consolidated
balance sheets as of December 31, 2005 and 2006 and the
related consolidated statements of operations, of changes in
stockholders (deficit) equity and of cash flows for each
of the three years in the period ended December 31, 2006
and notes thereto appear elsewhere in this prospectus. We have
derived the following consolidated financial data as of
December 31, 2002, 2003 and 2004 and for the year ended
December 31, 2002 from unaudited consolidated financial
statements, which are not included in this prospectus. We have
derived the following consolidated financial data as of
March 31, 2007 and for the three months ended
March 31, 2006 and 2007 from unaudited consolidated
financial statements, which appear elsewhere in this prospectus,
which we have prepared on the same basis as the audited
consolidated financial statements and which, in the opinion of
our management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. Interim financial
results are not necessarily indicative of results to be expected
for the full year or for any future reporting period. As
discussed in note 2 to our consolidated financial
statements, we have restated our consolidated financial
statements for the years ended December 31, 2004 and 2005
and the three months ended March 31, 2006 to correct for
revenue recognition errors.

You should read the following discussion and analysis of our
financial condition and results of operations together with our
consolidated financial statements and the related notes and
other financial information appearing at the end of this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus,
including information with respect to our plans and strategy for
our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should
review the Risk Factors section of this prospectus
for a discussion of important factors that could cause actual
results to differ materially from the results described in or
implied by the forward-looking statements contained in the
following discussion and analysis.

Restatement
of Previously Issued Consolidated Financial Statements

We have restated our previously issued consolidated financial
statements and related footnotes as of December 31, 2005,
for the years ended December 31, 2004 and 2005 and for the
three months ended March 31, 2006. We have restated our
consolidated financial statements to correct an error in
accounting for the revenue recognition of our collaboration and
license agreement and related agreements with Takeda
Pharmaceutical Company Limited, or Takeda. All amounts in this
discussion and analysis have been updated to reflect this
restatement. For additional information regarding this
restatement, see note 2 to our consolidated financial
statements.

The error we are correcting in the restatement originated in the
fourth quarter of 2004 and continued throughout 2005. The
identification of this error occurred as a result of our
reevaluation of the assumptions we used under Emerging Issues
Task Force, or EITF, Issue
No. 00-21,Revenue Arrangements with Multiple
Deliverables, or EITF
00-21, in
accounting for arrangements with multiple deliverables that
require significant judgment and estimates.

We reassessed the stand-alone value to Takeda of the
deliverables under our joint collaboration and license agreement
with Takeda, at the time we became obliged to make such
deliverables, by examining objective and reliable evidence of
the fair value of the undelivered items. As a result of this
reassessment, we determined that the previous application of a
single unit of accounting for the deliverables from the joint
collaboration and license agreement with Takeda was not
appropriate. In addition, we determined that the substantive
milestone method of revenue recognition we had been using was
not appropriate to account for the cash payments received from
Takeda related to our completion of these required deliverables
and that a time-based model would be more appropriate to account
for these cash payments. Accordingly, in the restated
consolidated financial statements for the years ended
December 31, 2004 and 2005, we reduced the milestone
revenue and increased research and development revenue. Total
revenue increased by $1.2 million for the year ended
December 31, 2004 and decreased by $6.8 million for
the year ended December 31, 2005. In addition, related
deferred revenue increased by $5.6 million at
December 31, 2005.

We will report the correct balances in our consolidated
financial statements for the quarters ended June 30, 2006
and September 30, 2006 when we next file them. All data
included in this discussion and analysis for the years ended
December 31, 2004 and 2005 and for the three months ended
March 31, 2006 are derived from our restated financial
statements for those periods.

Overview

We are an emerging pharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
In January 2006, we received marketing approval from the FDA for
our first product, AMITIZA, for the treatment of chronic
idiopathic constipation in adults.

We are party to a collaboration and license agreement with
Takeda to jointly develop and commercialize AMITIZA for chronic
idiopathic constipation, irritable bowel syndrome with
constipation, opioid-induced bowel dysfunction and other
gastrointestinal indications in the United States and Canada. We
have the right to

co-promote AMITIZA along with Takeda in these markets. We
and Takeda initiated commercial sales of AMITIZA in the United
States for the treatment of chronic idiopathic constipation in
adults in April 2006.

We and Takeda initiated commercial sales of AMITIZA for the
treatment of chronic idiopathic constipation in adults in April
2006, and we first generated product royalty revenue in the
quarter ended June 30, 2006. Since inception we have
incurred operating losses and, as of March 31, 2007, we had
an accumulated deficit of $22.9 million. Our net losses
were $19.5 million in 2004 and $316,000 in 2005. We
recognized net income of $21.8 million in 2006 and $516,000
for the three months ended March 31, 2007. The historical
losses resulted principally from costs incurred in our research
and development programs and from our general and administrative
expenses. We expect to continue to incur significant and
increasing expenses for the next several years as we continue to
expand our research and development activities, seek regulatory
approvals for additional indications for AMITIZA and for other
compounds as they are developed and augment our sales and
marketing capabilities. Whether we are able to sustain
profitability will depend upon our ability to generate revenues
in the future that exceed these expenses. In the near term, our
ability to generate product revenues will depend primarily on
the successful commercialization and continued development of
additional indications for AMITIZA.

We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and all other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG will in turn license back to us on an exclusive
basis. If we have not committed specified development efforts to
any prostone compound other than AMITIZA, SPI-8811 and SPI-017
by the end of a specified period, which ends on the later of
June 30, 2011 or the date upon which Drs. Kuno and
Ueno no longer control our company, then the commercial rights
to that compound will revert to Sucampo AG, subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.

In September 2006, we acquired all of the capital stock of two
affiliated European and Asian operating companies, Sucampo
Europe and Sucampo Japan, that were previously under common
control with us. Sucampo Europe and Sucampo Japan are now wholly
owned subsidiaries of our company. In this prospectus, we have
presented financial statements that reflect our financial
position, results of operations and cash flows on a consolidated
basis with these two operating companies because the acquisition
was consummated during the year ended December 31, 2006,
and this managements discussion and analysis of financial
condition and results of operations discusses such consolidated
financial statements.

Our
Clinical Development Programs

We are developing AMITIZA and our other prostone compounds for
the treatment of a broad range of diseases. The most advanced of
these programs are:



AMITIZA. In connection with our marketing
approval for AMITIZA for the treatment of chronic idiopathic
constipation in adults, we committed to the FDA to conduct
post-marketing studies to evaluate the safety of the product in
pediatric patients, in patients with renal impairment and in
patients with hepatic impairment. We initiated these studies in
January 2007. In addition, we are developing AMITIZA to treat
irritable bowel syndrome with constipation and opioid-induced
bowel dysfunction. We recently completed two pivotal
Phase III clinical trials of AMITIZA for the treatment of
irritable bowel syndrome with constipation and a follow-on
safety study to assess the long-term use of AMITIZA as a
treatment for this indication. Based upon the results of these
trials, we submitted a supplement to our existing new drug
application, or NDA, for AMITIZA to the FDA in June 2007 seeking
marketing approval for AMITIZA for the treatment of this
indication. In addition, we plan to commence Phase III
pivotal clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction in the third quarter of 2007.
Our collaboration and co-promotion arrangement with Takeda also
covers these additional indications for AMITIZA.

disease and gastrointestinal disorders associated with cystic
fibrosis. We also are planning to develop an inhaled formulation
of SPI-8811 for the treatment of respiratory symptoms of cystic
fibrosis and chronic obstructive pulmonary disease. Our near
term focus is on the development of SPI-8811 as a treatment for
NSAID-induced ulcers. We have completed Phase I clinical
trials of SPI-8811 in healthy volunteers and plan to commence a
Phase II clinical trial of this product candidate for the
treatment of NSAID-induced ulcers in the third quarter of 2007.
We also plan to commence a Phase II
proof-of-concept
study of SPI-8811 in patients with portal hypertension in 2007.



SPI-017. We are developing SPI-017 to treat
vascular disease and central nervous system disorders. We are
initially focused on developing an intravenous formulation of
this product candidate for the treatment of peripheral arterial
disease. We also are developing an oral formulation of SPI-017
for the treatment of Alzheimers disease. We plan to
commence Phase I clinical trials of the intravenous
formulation of SPI-017 and Phase I clinical trials of the
oral formulation in 2008.

Financial
Terms of our Collaboration with Takeda

We entered into a 16-year collaboration agreement with Takeda in
October 2004 to jointly develop and commercialize AMITIZA for
gastrointestinal indications in the United States and Canada. We
also entered into a related supplemental agreement with Takeda
in February 2006. Under the terms of these agreements, we have
received a variety of payments and will have the opportunity to
receive additional payments in the future.

Up-front
Payment

Upon signing the original agreement with Takeda, we received a
non-refundable up-front payment of $20.0 million. We
deferred $2.4 million of this up-front payment associated
with our obligation to participate in joint committees with
Takeda and we are recognizing this amount as collaboration
revenue ratably over the
16-year life
of the agreement. We are recognizing the remaining
$17.6 million as research and development revenue ratably
over the estimated development period associated with the
chronic idiopathic constipation and irritable bowel syndrome
with constipation indications, which we estimate will be
completed by June 2007 as evidenced by the filing with the FDA
of a supplement to our existing NDA for AMITIZA relating to the
treatment of irritable bowel syndrome with constipation.

Product
Development Milestone Payments

We have also received the following non-refundable payments from
Takeda reflecting our achievement of specific product
development milestones:



$10.0 million upon the filing of the NDA for AMITIZA to
treat chronic idiopathic constipation in March 2005;



$20.0 million upon the initiation of our Phase III
clinical trial related to AMITIZA for the treatment of irritable
bowel syndrome with constipation in May 2005; and



$20.0 million upon the receipt of approval from the FDA for
AMITIZA for the treatment of chronic idiopathic constipation in
adults in January 2006.

We are recognizing each of these payments as research and
development revenue ratably over the estimated development
period associated with the chronic idiopathic constipation and
irritable bowel syndrome with constipation indications, which we
estimated would be completed by June 2007.

In June 2007, we submitted a supplement to our existing NDA for
AMITIZA to the FDA seeking marketing approval for AMITIZA for
the treatment of irritable bowel syndrome with constipation. As
a result of this submission, Takeda is required by the terms of
our collaboration agreement with them to make a
$30.0 million milestone payment to us. We expect to
recognize the entire amount of this payment as research and
development revenue in the quarter ended June 30, 2007,
reflecting the end of the development period for AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation.

In addition, our collaboration agreement requires that Takeda
pay us up to a further aggregate of $60.0 million
conditioned upon our achievement of future regulatory milestones
relating to AMITIZA. We would recognize these payments as
research and development revenue ratably over the respective
performance periods.

Research
and Development Cost-Sharing for AMITIZA

Our collaboration agreement with Takeda provides for the sharing
between Takeda and us of the costs of our research and
development activities for AMITIZA in the United States and
Canada as follows:



Takeda was responsible for the first $30.0 million in
research and development expenses we incurred after October 2004
related to AMITIZA for the treatment of chronic idiopathic
constipation and irritable bowel syndrome with constipation. We
received reimbursement payments from Takeda of $1.5 million
in 2004 and $28.5 million in 2005. We are recognizing each
of these payments as research and development revenue ratably
over the estimated development period associated with the
chronic idiopathic constipation and irritable bowel syndrome
with constipation indications, which we estimate will be
completed by June 2007, with the exception that we do not
recognize revenue in any period to the extent that it resulted
in cumulative recognized revenue exceeding cumulative
reimbursable expenses incurred.

We are responsible for the next $20.0 million in research
and development expenses we incur related to AMITIZA for the
treatment of chronic idiopathic constipation and irritable bowel
syndrome with constipation. Thereafter, any expenses in excess
of $50.0 million are shared equally between Takeda and us.
Because we have received reimbursements of $30.0 million
from Takeda, we are now responsible for the next
$20.0 million of these expenses. Of this next
$20.0 million, we had incurred $11.0 million through
March 31, 2007. We do not expect aggregate expenses
necessary to complete development of AMITIZA for these two
indications will exceed the $20.0 million for which we are
solely responsible.



For research and development expenses relating to changing or
expanding the labeling of AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation,
Takeda is responsible for 70% of these expenses and we are
responsible for 30%. We have not incurred any expenses of this
nature to date. However, in connection with our marketing
approval for AMITIZA for the treatment of chronic idiopathic
constipation in adults, we committed to the FDA to conduct
post-marketing studies to evaluate the safety of the product in
patients with renal impairment and patients with hepatic
impairment. We initiated these studies in January 2007. The
expenses of these studies, which we began to incur in the
quarter ended September 30, 2006, are being shared 70% by
Takeda and 30% by us. Through March 31, 2007, we had
incurred $803,000 of these expenses, of which we will be
reimbursed $562,000.



The expense of Phase IV clinical trials of AMITIZA for the
treatment of chronic idiopathic constipation in pediatric
patients that we initiated in January 2007 will be borne by
Takeda in full. As of March 31, 2007, we had incurred
$2.4 million of these expenses, all of which will be
reimbursed by Takeda.



For expenses in connection with additional clinical trials
required by regulatory authorities relating to AMITIZA to treat
chronic idiopathic constipation or irritable bowel syndrome with
constipation, Takeda and we are responsible to share these
expenses equally. We have not incurred any expenses of this
nature to date.



Takeda is responsible for the first $50.0 million in
expenses we incur related to the development of AMITIZA for each
gastrointestinal indication other than chronic idiopathic
constipation and irritable bowel syndrome with constipation, and
any expenses in excess of $50.0 million are shared equally
between Takeda and us. We plan to initiate clinical trials of
AMITIZA for the treatment of opioid-induced bowel dysfunction in
the third quarter of 2007. We began incurring expenses for these
trials in the third quarter of 2006. Currently, we do not
anticipate the aggregate expenses necessary to complete

our development of AMITIZA for this indication will exceed
$54.0 million, of which Takeda will be responsible for
$52.0 million and we will be responsible for
$2.0 million. As of March 31, 2007, we had incurred
$1.5 million of these expenses.



Takeda is responsible for the first $20.0 million in
expenses we incur related to the development of each new
formulation of AMITIZA, and any expenses in excess of
$20.0 million are shared equally between Takeda and us. We
have not incurred any expenses of this nature to date.

Co-Promotion
Expense Reimbursements

In connection with our exercise of our co-promotion rights under
the collaboration agreement and our entry into the related
supplemental agreement in February 2006, Takeda agreed to
reimburse us for a portion of our expenses related to our
specialty sales force. We estimate that these reimbursements
will cover approximately 80% of the direct costs for our current
sales force of 38 sales representatives. We began to receive
monthly reimbursement for these expenses during the quarter
ended June 30, 2006, reflecting the commencement by our
sales representatives of their activities in April 2006, and we
had recognized $3.4 million of co-promotion revenue
reflecting these reimbursements through December 31, 2006.
In the quarter ended March 31, 2007, we recognized $974,000
of co-promotion revenue reflecting these reimbursements.

Takeda also agreed in the supplemental agreement to reimburse us
for all of the costs we incur in connection with specified
miscellaneous marketing activities related to the promotion of
AMITIZA. During the year ended December 31, 2006, we
recognized $779,000 of co-promotion revenue reflecting these
reimbursements and during the quarter ended March 31, 2007,
we recognized $158,000. We completed the miscellaneous marketing
activities to which these reimbursements relate in the quarter
ended March 31, 2007 and, accordingly, we do not expect to
recognize additional co-promotion revenue related to these
activities.

Product
Royalty Revenue

Takeda is obligated to pay us a varying royalty based on a
percentage of the net sales revenue from the sale of AMITIZA in
the United States and Canada. The actual percentage will depend
on the level of net sales revenue during each calendar year. All
sales of AMITIZA in the United States and Canada, including
those arranged by our specialty sales force, will be made
through Takeda. We began to recognize product royalty revenue in
the quarter ended June 30, 2006, reflecting the
commencement of commercial sales of AMITIZA in April 2006.
During the year ended December 31, 2006, we recognized a
total of $6.6 million as product royalty revenue under our
collaboration agreement with Takeda and during the quarter ended
March 31, 2007, we recognized $2.3 million as product
royalty revenue.

Commercialization
Milestone Payments

Our collaboration agreement also requires Takeda to pay us up to
an additional aggregate of $50.0 million conditioned upon
the achievement of specified targets for annual net sales
revenue from AMITIZA in the United States and Canada. We had not
met these targets as of March 31, 2007.

Option
Payment

In November 2004, we received $5.0 million from Takeda as
an option payment to continue negotiations for the joint
development and commercialization of AMITIZA for
gastrointestinal indications in additional territories. In the
event that these negotiations failed to produce a definitive
agreement by specified dates, the terms of the option required
us to repay $2.5 million of the original $5.0 million
option payment to Takeda. As to the $2.0 million of the
option payment relating to joint development and
commercialization in Asia, we recorded $1.0 million as
current deferred revenue and $1.0 million as other
short-term liabilities in 2004. As to the $3.0 million of
the option payment relating to Europe, the Middle East and
Africa, we recorded $1.5 million as long term deferred
revenue and $1.5 million as other long-term liabilities in
2004. The option right for Asia expired during 2005, at which
time we repaid $1.0 million to Takeda and recognized the
remaining $1.0 million as contract revenue. The option
right for Europe, the Middle East and Africa expired

Under our license agreement with our affiliate, Sucampo AG, we
are required to pay Sucampo AG 5% of every milestone payment we
receive from a sublicensee, such as Takeda. We also are
obligated to make the following milestone payments to Sucampo AG:



$500,000 upon initiation of the first Phase II clinical
trial for each compound in each of three territories covered by
the license: North, Central and South America, including the
Caribbean; Asia; and the rest of the world; and



$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories.

In addition, we are required to pay Sucampo AG, on a
country-by-country
basis, royalty payments of 6.5% of net sales for every product
covered by existing patents and, if applicable, thereafter 4.25%
of net sales for every product candidate covered by new or
improvement patents assigned by us to Sucampo AG. With respect
to sales of AMITIZA in North, Central and South America,
including the Caribbean, the rates for these royalty payments
are set at 3.2% and 2.1% of net sales, respectively. The product
royalties that we pay to Sucampo AG are based on total product
net sales, whether by us or a sublicensee, and not on amounts
actually received by us. We expensed $1.2 million in
product royalties to Sucampo AG during the year ended
December 31, 2006 and $410,000 during the three months
ended March 31, 2007, reflecting 3.2% of net sales for
AMITIZA during each of these periods, which we recorded as
product royalties to related parties on the consolidated
statement of operations.

We paid Sucampo AG $1.0 million, reflecting 5% of the
$20.0 million up-front payment that we received from Takeda
with respect to AMITIZA in October 2004. We characterized this
payment as a milestone royalty and we expensed it as incurred.

We also have paid Sucampo AG $2.5 million, reflecting 5% of
the aggregate of $50.0 million of development milestone
payments that we received from Takeda through December 31,
2006, and $250,000 upon marketing approval of AMITIZA by the FDA
for the treatment of chronic idiopathic constipation in adults.
These payments were characterized as milestone royalties to
related parties and were expensed as incurred.

We will be obligated to pay Sucampo AG $1.5 million,
reflecting 5% of the $30.0 million milestone payment due to
us from Takeda as a result of our submission to the FDA in June
2007 of the supplement to our existing NDA for AMITIZA seeking
marketing approval for AMITIZA for the treatment of irritable
bowel syndrome with constipation. We expect to expense the
entire amount of this payment as milestone royalties to related
parties in the quarter ended June 30, 2007.

Supply
Agreement with R-Tech

We entered into an exclusive supply arrangement with our
affiliate, R-Tech, in March 2003. In return for the exclusive
right to manufacture and supply clinical and commercial supplies
of AMITIZA and a second prostone compound that we are no longer
developing in North, Central and South America, including the
Caribbean, R-Tech agreed to make the following milestone
payments to us:



$1.0 million upon entry into the arrangement, which we
received in March 2003;



$2.0 million upon commencement of a first Phase II
clinical trial relating to AMITIZA to treat irritable bowel
syndrome with constipation, which we received in April
2003; and



$3.0 million upon commencement of a first Phase II
clinical trial for the other compound, which we received in
2003. On March 31, 2005, after evaluating the Phase II
study results, we determined to discontinue any further research
and development related to this compound and will not receive
any further payments in respect of this compound.

We evaluated the $6.0 million in cash receipts from R-Tech
and determined these payments were made for the exclusive right
to supply inventory to us and, accordingly, should be deferred
until commercialization of the drugs begins. We also were unable
to accurately apportion value between AMITIZA and the other
compound based on the information available to us and determined
that the full $6.0 million deferred amount should be
amortized over the contractual life of the relationship, which
we concluded was equivalent to the commercialization period of
AMITIZA and the other compound. Accordingly, we began
recognizing this revenue during the quarter ended June 30,
2006 and will continue recognizing it ratably on a straight-line
basis over the remaining life of our supply agreement with
R-Tech through 2026. As of March 31, 2007, we had
recognized a total of $419,000 as contract revenue from related
parties under our exclusive supply arrangement with R-Tech.

The supply agreement also requires payment of a specified
transfer price in respect of supplies of AMITIZA. Takeda is
obligated to make such payment, without reimbursement from us,
in respect of commercial supplies of AMITIZA for the territory
covered by our collaboration with Takeda.

In June 2005, Sucampo Europe entered into an exclusive supply
agreement with R-Tech. In return for the exclusive right to
manufacture and supply clinical and commercial supplies of
AMITIZA in Europe, the Middle East and Africa, R-Tech agreed to
pay us $2.0 million in anticipation of entering into this
agreement, which we received in March 2005. We determined that
this payment should be deferred until commercialization of
AMITIZA begins within the specified territory and, accordingly,
the entire $2.0 million is reflected as deferred revenue at
March 31, 2007.

On February 1, 1999, we entered into a five-year
collaboration agreement with an unrelated third party, which
established a long-term alliance for the development and
commercialization of drugs to treat ophthalmic diseases. Under
this arrangement, we agreed to conduct preclinical tests,
clinical tests and other research and development for designated
compounds, all of which were unrelated to prostones. In turn, we
received non-refundable payments totalling $8.0 million. We
recognized these payments ratably over the term of the project,
which approximated the term of the agreement. We recognized
$67,000 in revenue under this agreement in 2004, which we
characterized as contract revenue. All revenues related to this
agreement were recognized by the first quarter of 2004. In 2004,
we determined not to continue this relationship, and we allowed
the collaboration agreement to expire.

Critical
Accounting Policies and Estimates

This discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of our consolidated financial
statements requires us to make estimates and judgments that
affect our reported assets, liabilities, revenues and expenses.
Actual results may differ significantly from those estimates
under different assumptions and conditions.

the nature of the estimate or assumption is material due to the
level of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters
to change; and



the impact of the estimates and assumptions on financial
condition or operating performance is material.

Our significant accounting policies are described in more detail
in note 3 of our consolidated financial statements.

Revenue
Recognition

Collaboration
and License Agreements

Our primary sources of revenue include up-front payments,
product development milestone payments, reimbursements of
research and development expenses, reimbursement of co-promotion
costs related to our specialty sales force and miscellaneous
marketing activities, and product royalties. We recognize
revenue from these sources in accordance with Staff Accounting
Bulletin, or SAB, 104, Revenue Recognition,
EITF
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, and EITF
No. 00-21,
Revenue Arrangements with Multiple
Deliverables. The application of EITF
00-21
requires subjective analysis and requires us to make estimates
and assumptions about whether deliverables within
multiple-element arrangements are separable from the other
aspects of the contractual arrangement into separate units of
accounting and, if so, to determine the fair value to be
allocated to each unit of accounting.

We evaluated the multiple deliverables within our joint
collaboration and license agreement and the related supplemental
agreement with Takeda in accordance with the provisions of EITF
00-21 to
determine whether our deliverables have value to Takeda on a
stand-alone basis and whether objective reliable evidence of
fair value of the undelivered items exists. We separately
evaluate deliverables that meet these criteria for the purposes
of revenue recognition. We combine deliverables that do not meet
these criteria and account for them as a single unit of
accounting.

In accordance with EITF
00-21, we
recognize the cash flows associated with the individual units of
accounting from the joint collaboration and license agreement as
revenue using a time-based model that recognizes the revenue
ratably over the period in which we complete our performance
requirements. However, revenue is limited to amounts that are
non-refundable and that Takeda is contractually obligated to
pay. With respect to the portion of the up-front payment we
attributed to our obligation to participate in joint committees

with Takeda, which we present as collaboration revenue, the
performance period is the
16-year term
of the collaboration agreement. With respect to the remainder of
the up-front payment, as well as the product development
milestone payments and the reimbursement of research and
development expenses, all of which we present as research and
development revenue, the performance period is the estimated
development period for AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation. We
estimated this performance period would be completed by June
2007 as evidenced by the filing with the FDA of a supplement to
our existing NDA for AMITIZA relating to the treatment of
irritable bowel syndrome with constipation. We have determined
that we are acting as a principal under the collaboration
agreement and, as such, we record these amounts on a gross basis
as collaboration revenue and as research and development revenue.

Reimbursements of co-promotion costs under the supplemental
agreement with Takeda, including costs associated with our
specialty sales force and miscellaneous marketing activities,
are recognized as
co-promotion
revenue as the related costs are incurred and Takeda becomes
contractually obligated to pay the amounts. We have determined
that we are acting as a principal under the supplemental
agreement and, as such, we record reimbursements of these
amounts on a gross basis as co-promotion revenue.

Product royalty revenue is based on third-party sales of
licensed products. We record these amounts on the accrual basis
when earned in accordance with contractual terms when
third-party results are reliably measurable, collectability is
reasonably assured and all other revenue recognition criteria
are met. Because of the lack of historical data regarding sales
returns, we do not report as revenue royalty payments related to
the portion of sales by Takeda that are subject to a right of
return until the right of return lapses.

We do not immediately recognize as revenue option fees received
for other potential joint collaboration and license agreements
with Takeda because the transactions do not represent a separate
earnings process. Our policy is to recognize revenue immediately
upon expiration of the option or to commence revenue recognition
upon exercise of the option and continue recognition over the
estimated performance period because we will have contingent
performance obligations if and when the options are exercised.
We record option fees as contract revenue when they are
recognized.

Other
Revenue Sources

We recorded revenues from the performance of research and
development cost reimbursement activities under the
collaboration agreement for our discontinued opthalmic
collaborative relationship over the period in which the actual
research and development activities occurred, similar to the
time-based model, which was equivalent to the term of the
collaboration agreement.

We recognize contract revenue related to development activities
with related parties under the time-based method and we
recognize contract revenue related to consulting activities with
related parties as performance is rendered. We record
cost-sharing payments received in advance as deferred revenue
and recognize these payments as revenue over the applicable
clinical trial period.

Accrued
Expenses

As part of our process of preparing our consolidated financial
statements, we are required to estimate accrued expenses. This
process involves reviewing and identifying services which have
been performed by third parties on our behalf and determining
the value of these services. Examples of these services are
payments to clinical investigators, professional fees, such as
accountants and attorneys fees, and payments to
contracted service organizations. In addition, we make estimates
of costs incurred to date but not yet invoiced to us in relation
to external contract research organizations and clinical site
costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted
costs, when evaluating the adequacy of the accrued liabilities.
We must make significant judgments and estimates in determining
the accrued balance in any accounting period.

In connection with these service fees, our estimates are most
affected by our understanding of the status and timing of
services provided relative to the actual levels of services
incurred by the service providers. The

majority of our service providers invoice us monthly in arrears
for services performed. In the event we do not identify costs
that have begun to be incurred or we under-estimate or
over-estimate the level of services performed or the costs of
such services, our reported expenses for the relevant period
would be too low or too high. We must also sometimes make
judgments about the date on which services commence, the level
of services performed on or before a given date and the cost of
such services. We make these judgments based upon the facts and
circumstances known to us in accordance with generally accepted
accounting principles.

Stock-Based
Compensation

Through December 31, 2005, we elected to follow Accounting
Principles Board Opinion, or APB, No. 25,
Accounting for Stock Issued to Employees, or
APB 25, and related interpretations in accounting for our
stock-based compensation plans, rather than the alternative fair
value accounting method provided for under Statement of
Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation Accounting
Principles Board Opinion, or SFAS 123.
Accordingly, we have not recorded stock-based compensation
expense for stock options issued to employees in fixed amounts
with exercise prices at least equal to the fair value of the
underlying common stock on the date of grant, including those
granted in 2004. We did not award stock options to employees in
2005, although we did award options to non-employees. In
note 3 to our consolidated financial statements included
later in this prospectus, we provide pro forma disclosures for
the years presented in accordance with SFAS 123 and related
pronouncements.

We account for transactions with non-employees in which services
are received in exchange for equity instruments under
EITF 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services. Under this
guidance, the transactions are based on the fair value of the
services received from the non-employees or the fair value of
the equity instruments issued, whichever is more reliably
measured. The fair value of the equity instruments is calculated
based on the guidance of SFAS 123. The three factors which
most affect stock-based compensation are the fair value of the
common stock underlying stock options for which stock-based
compensation is recorded, the vesting term of the options and
the volatility of such fair value of common stock. Accounting
for these equity instruments requires us to determine the fair
value of the equity instrument granted or sold. If our estimates
of the fair value of these equity instruments are too high or
too low, it would have the effect of overstating or understating
stock-based compensation expenses.

Given the lack of an active public market for our common stock,
our board of directors determined the fair value of our
class A common stock for stock option awards. Our board of
directors determined this fair value. In establishing the
estimates of fair value, our board of directors considered the
guidance set forth in the AICPA Practice Guide,
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, and made retrospective
determinations of fair value. The board of directors gave
significant consideration to the price of the class A
common stock sold to unrelated third parties in the first half
of 2006 in determining fair value for purposes of the stock
options granted to employees shortly after the sales occurred.

Determining the fair value of our class A common stock
requires making complex and subjective judgments. Our approach
to valuation is based on a discounted future cash flow approach
that uses our estimates of revenue, driven by assumed market
growth rates, and estimated costs as well as appropriate
discount rates. These estimates are consistent with the plans
and estimates that we use to manage our business. There is
inherent uncertainty in making these estimates. Although it is
reasonable to expect that the completion of this offering will
add value to the shares because they will have increased
liquidity and marketability, the amount of additional value
cannot be measured with precision or certainty.

In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123R, Share-Based
Payment, or SFAS 123R, a revision of
SFAS 123. SFAS 123R requires companies to recognize
expense associated with share-based compensation arrangements,
including employee stock options, using a fair value-based
option-pricing model, and eliminates the alternative to use
APB 25s intrinsic-value method of accounting for
share-based payments to employees. The standard generally allows
two alternative transition methods in the year of
adoption  prospective application and retroactive
application with restatement of prior financial statements to
include the same amounts that were previously included in the
SFAS 123 pro forma

disclosures. On January 1, 2006, we adopted SFAS 123R
using the prospective method of implementation. According to the
prospective transition method, the previously issued financial
statements will not be adjusted.

We implemented SFAS 123R utilizing the prospective
transition method. Under this method, we will recognize
compensation expense for all share-based payment awards granted
subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS 123R.

For recording our stock-based compensation expense under
SFAS 123R, we have chosen to use:



the straight-line method of allocating compensation cost under
SFAS 123R;



the Black-Scholes model as our chosen option-pricing model;



the simplified method to calculate the expected term for options
as discussed under SAB No. 7, Share-Based
Payment; and



an estimate of expected volatility based on the historical
volatility of similar entities whose share prices are publicly
available.

Our consolidated financial statements as of and for the year
ended December 31, 2006 reflect the impact of adopting
SFAS 123R. In accordance with the prospective transition
method, our consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the
impact of SFAS 123R, as all outstanding stock options as of
January 1, 2006 were fully vested. During the three months
ended March 31, 2007, we recognized
stock-based
compensation expense of $203,000 under SFAS 123R, which
related to employee stock options granted in May 2006 and August
2006.

Income
Taxes

As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We follow
SFAS No. 109, Accounting for Income
Taxes. This process requires us to estimate our actual
current tax exposure while assessing our temporary differences
resulting from the differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences have resulted in deferred tax assets and
liabilities, which are included in our consolidated balance
sheets. We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be
realized. We consider forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we
were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, we would
charge an adjustment to earnings for the deferred tax assets in
the period in which we make that determination. Likewise, if we
later determine that it is more likely than not that the net
deferred tax assets would be realized, we would reverse the
applicable portion of the previously provided valuation
allowance. In order for us to realize our deferred tax assets we
must be able to generate sufficient taxable income in the tax
jurisdictions in which our deferred tax assets are located.

Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against our deferred tax assets. We have recorded a
partial valuation allowance of $9.9 million as of
December 31, 2006, which resulted in a net deferred tax
asset of $4.9 million as of December 31, 2006, due to
uncertainties related to our ability to utilize a portion of the
deferred tax assets in years beyond 2007. Significant future
events, including marketing approval by the FDA of AMITIZA for
the treatment of irritable bowel syndrome with constipation, are
not in our control and could affect our future earnings
potential and consequently the amount of deferred tax assets
that will be utilized. We determined the amount of the valuation
allowance based on our estimates of income in the jurisdictions
in which we operate over the periods in which the related
deferred tax assets are recoverable.

As of December 31, 2006, we had foreign net operating loss
carryforwards of $2.2 million. The foreign net operating
loss carryforwards will begin to expire on December 31,
2010. As of December 31, 2006, we had U.S. general business
tax credits of $4.4 million, which also may be available to
offset future income tax liabilities and will expire if not
utilized at various dates beginning December 31, 2022. We
have recorded a partial valuation allowance as an offset to our
net deferred tax assets due to the uncertainty in determining
the

timing of the realization of certain tax benefits. In the event
that we determine that we will be able to realize all or a
portion of these assets, we will make an adjustment to the
valuation allowance. The Tax Reform Act of 1986 contains
provisions that may limit our ability to use our credits
available in any given year in which there has been a
substantial change in ownership interest, as defined. The
realization of the benefits of the tax credits is dependent on
sufficient taxable income in future years. Lack of earnings, a
change in the ownership of our company, or the application of
the alternative minimum tax rules could adversely affect our
ability to utilize these tax credits.

Related
Party Transactions

As part of our operations, we enter into transactions with our
affiliates. At the time of the transaction, we estimate the fair
market value of the transaction based upon estimates of net
present value or comparable third party information. For
material transactions with our foreign subsidiaries and
affiliates, we have evaluated the terms of transactions similar
to those that would have prevailed had the entities not been
affiliated.

Results
of Operations

Comparison
of three months ended March 31, 2006 and March 31,
2007

Revenues

The following table summarizes our revenues for the three months
ended March 31, 2006 and 2007:

Three Months Ended

March 31,

2006

2007

(Restated)

(in thousands)

Research and development revenue

$

22,441

$

9,366

Contract revenue

1,500



Collaboration revenue

37

37

Contract revenue 
related parties

29

116

Product royalty revenue



2,309

Co-promotion revenue

161

1,132

Total

$

24,168

$

12,960

Total revenues were $13.0 million for the three months
ended March 31, 2007 compared to $24.2 million for the
three months ended March 31, 2006, a decrease of
$11.2 million. This decrease was primarily due to a
decrease in payments received from Takeda for research and
development services performed by us.

Research and development revenue was $9.4 million for the
three months ended March 31, 2007 compared to
$22.4 million for the three months ended March 31,
2006, a decrease of $13.0 million. This decrease was
primarily due to our progress in the development of AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation and the recognition of payments
previously received from Takeda. We recognize our revenue for
this development work ratably over the estimated performance
period associated with the development of AMITIZA to treat
chronic idiopathic constipation and irritable bowel syndrome
with constipation. We initially estimated the development period
would be completed in December 2006. As a result of new study
evaluation requirements released by the Rome III Committee on
Functional Gastrointestinal Disorders, an international
committee of gastroenterologists, we concluded in June 2006 that
the completion of the development period would not occur until
May 2007. During the three months ended March 31,
2007, we extended the estimated completion of the development
period from May 2007 to June 2007 as a result of discussions
with Takeda. These determinations to extend the estimated
completion date from December 2006 to May 2007 and then to June
2007 had the effect of lengthening the period over which any
revenue not then recognized would be recognized.

The specific revenue streams associated with research and
development revenue for the three months ended March 31,
2006 and 2007 were as follows:



In March and May 2005, we received development milestone
payments from Takeda totaling
$30.0 million related to our efforts to develop AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation. We are recognizing these payments as
research and development revenue ratably over the performance
period, resulting in $3.5 million of research and
development revenue for the three months ended March 31,
2006 and $1.9 million for the three months ended
March 31, 2007. The smaller amount of revenue recognized
for the three months ended March 31, 2007 is a result
of our determinations to extend the estimated completion of the
development period.



In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA to treat chronic idiopathic constipation and irritable
bowel syndrome with constipation, which we are recognizing as
research and development revenue ratably over the performance
period, resulting in $13.1 million of research and
development revenue for the three months ended March 31,
2006 and $1.2 million for the three months ended
March 31, 2007. We recognized a significant portion of this
milestone payment in the three months ended March 31, 2006,
the quarter in which it was received, reflecting the fact that
we were then well into the estimated development period. The
smaller amount of revenue for the three months ended
March 31, 2007 also reflects our determinations, subsequent
to our receipt of this payment, to extend the estimated
completion of the development period.



We have received a total of $30.0 million of reimbursement
payments for research and development costs from Takeda related
to our efforts to develop AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation,
which we are recognizing as research and development revenue
ratably over the performance period, resulting in
$3.5 million of research and development revenue for the
three months ended March 31, 2006 and $1.9 million for
the three months ended March 31, 2007. The smaller amount
of revenue recognized for the three months ended
March 31, 2007 is a result of our determinations to extend
the estimated completion of the development period.



In October 2004, we received an up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA to treat chronic
idiopathic constipation and irritable bowel syndrome with
constipation. This amount is being recognized ratably over the
estimated performance period, resulting in $2.0 million of
research and development revenue for the three months ended
March 31, 2006 and $1.1 million for the three months
ended March 31, 2007. The smaller amount of revenue
recognized for the three months ended March 31, 2007 is a
result of our determination in June 2006 to extend the estimated
completion of the development period from December 2006 to
May 2007.



We also began to perform services and receive payments from
Takeda during the third quarter of 2006 for the following three
deliverables: post-marketing studies to evaluate the safety of
AMITIZA in patients with renal impairment and patients with
hepatic impairment, Phase IV clinical trials of AMITIZA for the
treatment of chronic idiopathic constipation in pediatric
patients and clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction. Total research and development
revenue associated with these three deliverables for the three
months ended March 31, 2007 was $3.3 million.

We had no contract revenue for the three months ended
March 31, 2007, compared to $1.5 million for the three
months ended March 31, 2006. Contract revenue represents
amounts released from previously deferred revenue that we
recognized upon the expiration of the option granted to Takeda
for joint development and commercialization rights for AMITIZA
in Europe, Africa and the Middle East. We recognized all of this
deferred revenue in the three months ended March 31, 2007.

Upon receipt of the $20.0 million
up-front
payment in 2004, we deferred $2.4 million to be recognized
using the time-based model over the 16-year performance period
of our participation in the committee meetings. During each of
the three months ended March 31, 2006 and 2007, we
recognized $37,000 of this deferred amount as collaboration
revenue.

Contract revenue from related parties represents reimbursement
of costs incurred by us on behalf of affiliated companies for
research and development consulting, patent maintenance and
certain administrative costs. These revenues are recognized in
accordance with the terms of the contract or project to which
they relate. Contract revenue from related parties was $116,000
for the three months ended March 31, 2007 compared to
$29,000 for the three months ended March 31, 2006, an
increase of $87,000.

Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize the
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. For the three
months ended March 31, 2007, we recognized
$2.3 million of product royalty revenue.

Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. For the first quarter of
2006, we received approximately $161,000 in reimbursement of
costs for miscellaneous marketing activities. We began to
receive reimbursement of costs for our sales force in the second
quarter of 2006 following the product launch of AMITIZA. For the
three months ended March 31, 2007, we recognized
$1.1 million of co-promotion revenues, of which
approximately $158,000 was for reimbursement of costs for
miscellaneous marketing activities and $974,000 was for
reimbursement of sales force costs.

In June 2007, we submitted a supplement to our existing NDA for
AMITIZA to the FDA seeking marketing approval for AMITIZA for
the treatment of irritable bowel syndrome with constipation. As
a result of this submission, Takeda is required by the terms of
our collaboration agreement with them to make a
$30.0 million milestone payment to us. We expect to
recognize the entire amount of this payment as research and
development revenue in the quarter ended June 30, 2007,
reflecting the end of the development period for AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation.

Research
and Development Expenses

Research and development expenses represent costs incurred in
connection with the in-licensing of our compounds, clinical
trials, activities associated with regulatory filings and
manufacturing efforts. Currently, we outsource our clinical
trials to independent contract research organizations in order
to minimize our overhead. We expense our research and
development costs as incurred.

Total research and development expenses for the three months
ended March 31, 2007 were $5.9 million compared to
$6.1 million for the three months ended March 31,
2006, a decrease of $174,000. In the three months ended
March 31, 2006 and 2007, our research and development
expenses were primarily those associated with the ongoing
Phase III clinical trials of AMITIZA for the treatment of
irritable bowel syndrome with constipation.

It is not practical for us to break out historical research and
development expenses by research project or by compound for
several reasons. First, clinical trials conducted with respect
to a single compound, such as AMITIZA, typically produce data
and information that is applicable to more than one indication.
Second, clinical trials on one compound may produce data and
information that is applicable to other compounds, particularly
given the relatively similar nature of several of our prostone
compounds. Finally, we have not historically maintained records
that allocate research and development costs among different
compounds, indications or projects.

We consider the continued development of our product pipeline
crucial to our success, and we anticipate that our research and
development costs will continue to increase as we advance our
research and development activities associated with our product
candidates.

Following the closing of this offering, we are obligated to
assume the filing and maintenance costs relating to the patent
portfolio licensed by us from Sucampo AG. In addition, following
this offering, we will be obligated under our license agreement
with Sucampo AG to incur at least $1.0 million annually to
develop compounds other than AMITIZA, SPI-8811 and SPI-017. We
estimate that these costs will increase our research and
developments expenses by approximately $1.7 million per
year. We began to incur patent maintenance costs in late 2006.

The successful development of our product candidates is highly
uncertain. At this time, we cannot reasonably estimate or know
the nature, timing and estimated costs of the efforts that will
be necessary to complete the remainder of the development of, or
the period, if any, in which material net cash inflows may
commence from, any of our product candidates. This is due to the
numerous risks and uncertainties associated with developing
drugs, including the uncertainty of:



the scope, rate of progress and expense of our clinical trials
and other research and development activities;



the potential benefits of our product candidates over other
therapies;



our ability to market, commercialize and achieve market
acceptance for any of our product candidates that we are
developing or may develop in the future;



future clinical trial results;



the terms and timing of regulatory approvals; and



the expense of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect
to the development of a product candidate could mean a
significant change in the costs and timing associated with the
development of that product candidate. For example, if the FDA
or other regulatory authority were to require us to conduct
clinical trials beyond those that we currently anticipate will
be required for the completion of clinical development of a
product candidate or if we experience significant delays in
enrollment in any of our clinical trials, we could be required
to expend significant additional financial resources and time on
the completion of clinical development.

General
and Administrative Expenses

General and administrative expenses consist primarily of
expenses for salaries and related personnel costs and expenses
for corporate activities.

The following table summarizes our general and administrative
expenses for the three months ended March 31, 2006 and 2007:

Three Months Ended

March 31,

2006

2007

(Restated)

(in thousands)

Salaries, benefits and related
costs

$

1,389

$

1,547

Legal and consulting expenses

893

720

Other operating expenses

686

567

Total

$

2,968

$

2,834

General and administrative expenses were $2.8 million for
the three months ended March 31, 2007 compared to
$3.0 million for the three months ended March 31,
2006, a decrease of $134,000. This decrease was due primarily to
a cumulative out-of-period adjustment of $358,000 that we
recorded during the three months ended March 31, 2007 to
reduce stock-based compensation expense that we had previously
recorded for the year ended December 31, 2006. This adjustment,
which reduced our general and administrative expenses for the
three months ended March 31, 2007, was offset in part by
approximately $224,000 of increased general and administrative
expenses related to increases in operational headcount and costs
related to our operation of Sucampo Europe and Sucampo Japan,
whose capital stock we acquired in September 2006. We expect to
incur significant increases in our general and administrative
expenses as we adopt public reporting requirements, implement
enhanced financial reporting controls to comply with
Sarbanes-Oxley and improve consolidation procedures and controls
related to Sucampo Europe and Sucampo Japan.

In June 2007, the compensation committee of our board of
directors authorized a one-time stock and cash award to each of
Drs. Kuno and Ueno, which will be settled immediately
following this offering. These awards are described in more
detail under the caption Certain Relationships and Related
Party Transactions  Special Stock and Cash Awards to
Drs. Kuno and Ueno. The value of these awards will
depend upon the public offering price per share in this
offering. Assuming a public offering price of $15.00 per
share, the midpoint of the price range set forth on the cover of
this prospectus, the aggregate value of these grants would be
$10.2 million. We expect to record general and
administrative expense for the quarter ended June 30, 2007
equal to the aggregate value of these awards, calculated
assuming a public offering price per share in this offering of
$15.00. If the actual public offering price is higher or lower
than $15.00 per share, we will record additional general and
administrative expense or a reduction in general and
administrative expense, respectively, for the quarter in which
we complete this offering. The amount of this additional expense
or expense reduction will be equal to the difference between the
actual amount of the cash portion of the awards and the expense
we originally recorded for the cash portion. The expense related
to the stock portion of these awards will be fixed based on the
fair value at the grant date, which is deemed to be
June 29, 2007, when Drs. Kuno and Ueno agreed to the
terms of the awards.

Selling
and Marketing Expenses

Selling and marketing expenses represent costs we incur to
co-promote AMITIZA and other selling and marketing expenses,
including costs for market research and analysis, marketing and
promotional materials, product samples and other costs.

Selling and marketing expenses were $3.2 million for the
three months ended March 31, 2007 compared to $948,000 for
the three months ended March 31, 2006, an increase of
$2.3 million. During the three months ended March 31,
2006, the selling and marketing expenses we incurred were
primarily in anticipation of our commercial launch of AMITIZA in
April 2006. These expenses were significantly less than those we
incurred during the three months ended March 31, 2007, when
our co-promotion efforts were fully operational.

In connection with our termination of our contract sales
agreement with Ventiv and our internalization of our specialty
sales force, we expect to incur approximately $250,000 of
transition expenses, primarily recruiting and training expenses
and a termination fee we will pay to Ventiv, which will affect
our selling and marketing expenses for the quarter ending
September 30, 2007. We also anticipate that our ongoing
expenses relating to this sales force will increase by
approximately $400,000 annually over what those expenses would
have been if we had maintained the Ventiv relationship, due to
compensation increases we expect to implement.

Milestone
Royalties to Related Parties

Milestone royalties to related parties were $1.3 million
for the three months ended March 31, 2006. In the three
months ended March 31, 2006, we paid Sucampo AG
$1.0 million, reflecting the 5% we owed them in respect of
the $20.0 million development milestone payment we received
from Takeda during that period, and a $250,000 milestone
payment for regulatory approval of AMITIZA. We did not pay any
milestone royalties to related parties in the three months ended
March 31, 2007.

We will be obligated to pay Sucampo AG $1.5 million,
reflecting 5% of the $30.0 million milestone payment due to
us from Takeda as a result of our submission in June 2007 of the
supplement to our existing NDA for AMITIZA seeking marketing
approval for AMITIZA for the treatment of irritable bowel
syndrome with constipation. We expect to expense the entire
amount of this payment as milestone royalties to related parties
in the quarter ended June 30, 2007.

Product
Royalties to Related Parties

Product royalties to related parties represent our obligation to
pay Sucampo AG a royalty of 3.2% of net sales of AMITIZA in
North, Central and South America, including the Caribbean. The
product royalties that we pay to Sucampo AG are based on total
product net sales, whether by us or a sublicensee, and not on
amounts actually received by us. We began to incur product
royalty expenses for net sales of AMITIZA in the second quarter
of 2006 following the product launch of AMITIZA. In the quarter
ended March 31, 2007, we expensed $410,000 in product
royalties to related parties. Accordingly, we did not owe any
product royalties to related parties for the three months
ended March 31, 2006.

The following table summarizes our non-operating income and
expense for the three months ended March 31, 2006 and 2007:

Three Months Ended

March 31,

2006

2007

(Restated)

(in thousands)

Interest income

$

306

$

324

Interest expense

(20

)

(4

)

Other income (expense), net

139

(2

)

Total, net

$

425

$

318

Interest income was $324,000 for the three months ended
March 31, 2007 compared to $306,000 for the three months
ended March 31, 2006, an increase of $18,000. The increase
was primarily due to an increase in the funds available for
investment. Interest expense was $4,000 for the three months
ended March 31, 2007 compared to $20,000 for the three
months ended March 31, 2006, a decrease of $16,000. This
decrease reflected our repayment in full in June 2006 of related
party debt instruments issued by Sucampo Japan and Sucampo
Europe. Other income (expense), net represents foreign currency
exchange gains and losses, which we expect will fluctuate from
period to period.

Income
Taxes

For the three months ended March 31, 2006 and 2007, our
consolidated effective tax rate was 0.0% and 39.7%,
respectively. The change in the effective tax rate for the three
months ended March 31, 2007 from the three months ended
March 31, 2006 was due primarily to the utilization of
approximately $340,000 in U.S. deferred tax assets. The
utilization of our U.S. deferred tax assets for the three months
ended March 31, 2006 was offset by a corresponding release
of our valuation allowance.

Comparison
of years ended December 31, 2005 and December 31,
2006

Revenues

The following table summarizes our revenues for the years ended
December 31, 2005 and 2006:

Year Ended

December 31,

2005

2006

(Restated)

(in thousands)

Research and development revenue

$

38,960

$

46,382

Contract revenue

1,000

1,500

Collaboration revenue

147

147

Contract revenue 
related parties

98

404

Product royalty revenue



6,591

Co-promotion revenue



4,243

Total

$

40,205

$

59,267

Total revenues were $59.3 million in 2006 compared to
$40.2 million in 2005, an increase of $19.1 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us, product royalties from AMITIZA sales, and
reimbursements of co-promotion efforts performed by us to market
and sell AMITIZA.

Research and development revenue was $46.4 million for the
year ended December 31, 2006 compared to $39.0 million
for the year ended December 31, 2005, an increase of
$7.4 million. The specific revenue streams

associated with research and development revenue for the years
ended December 31, 2005 and 2006 were as follows:



In March and May 2005, we received development milestone
payments from Takeda totaling
$30.0 million related to our efforts to develop AMITIZA.
These payments are being recognized as research and development
revenue ratably over the performance period, resulting in
$16.2 million of research and development revenue in 2005
and $10.5 million in 2006. The smaller amount of revenue
recognized in 2006 is a result of our determination in June 2006
to extend the estimated completion of the development period
from December 2006 to May 2007.



In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA, which is being recognized as research and development
revenue ratably over the performance period, resulting in
$17.8 million of research and development revenue in 2006.



During the year ended December 31, 2005, we received a
total of $28.5 million of reimbursement payments for
research and development costs from Takeda related to our
efforts to develop AMITIZA, which are being recognized as
research and development revenue ratably over the performance
period, resulting in $14.7 million of research and
development revenue in 2005 and $10.5 million in 2006. The
smaller amount of revenue recognized in 2006 is a result of our
determination in June 2006 to extend the estimated completion of
the development period.



In October 2004, we received an up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA. This amount is being
recognized ratably over the estimated performance period,
resulting in $8.1 million of research and development
revenue during 2005 and $6.2 million during 2006. The
smaller amount of revenue recognized in 2006 is a result of our
determination in June 2006 to extend the estimated completion of
the development period.



We also began to perform services and receive payments from
Takeda during the year ended December 31, 2006 for the
following three deliverables: post-marketing studies to evaluate
the safety of AMITIZA in patients with renal impairment and
patients with hepatic impairment, Phase IV clinical trials of
AMITIZA for the treatment of chronic idiopathic constipation in
pediatric patients and clinical trials of AMITIZA for the
treatment of opioid-induced bowel dysfunction. Total research
and development revenue associated with these three deliverables
during 2006 was $1.1 million.

Contract revenue was $1.5 million for the year ended
December 31, 2006 compared to $1.0 million for the
year ended December 31, 2005, an increase of $500,000.
Contract revenue represents amounts released from previously
deferred revenue that we recognized upon the expiration of the
option granted to Takeda for joint development and
commercialization rights for AMITIZA in Europe, Africa and the
Middle East.

Upon receipt of the $20.0 million
up-front
payment, we deferred $2.4 million to be recognized using
the time-based model over the 16-year performance period of our
participation in the committee meetings. During each of the
years ended December 31, 2005 and 2006, we recognized
$147,000 of this deferred amount as collaboration revenue.

Contract revenue from related parties represents reimbursement
of costs incurred by us on behalf of affiliated companies for
research and development consulting, patent maintenance and
certain administrative costs. These revenues are recognized in
accordance with the terms of the contract or project to which
they relate. Contract revenue from related parties was $404,000
for the year ended December 31, 2006 compared to $98,000
for the year ended December 31, 2005, an increase of
$306,000.

Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize the
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. In the year ended
December 31, 2006, we recognized $6.6 million of
product royalty revenue. Of this product royalty revenue, we
recognized $4.5 million in the quarter ended June 30,
2006, which reflected stocking purchases by drug wholesalers to
establish their initial inventory levels, and therefore these
revenues may not be indicative of product royalty revenue levels
that we may achieve in future periods.

Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. We began to receive
reimbursement of these expenses in the second quarter of 2006
following the

product launch of AMITIZA. In the year ended December 31,
2006, we recognized $4.2 million of co-promotion revenues.

Research
and Development Expenses

Total research and development expenses for the year ended
December 31, 2006 were $16.4 million compared to
$31.2 million for the year ended December 31, 2005, a
decrease of $14.8 million. The higher costs in 2005 reflect
the significant research and development expenses incurred by us
during that period in connection with the filing of the NDA for
AMITIZA to treat chronic idiopathic constipation in adults and
the initiation of Phase III clinical trials of AMITIZA for
the treatment of irritable bowel syndrome with constipation. In
2006, our research and development expenses were primarily those
associated with the ongoing Phase III clinical trials of
AMITIZA for the treatment of irritable bowel syndrome with
constipation.

General
and Administrative Expenses

The following summarizes our general and administrative expenses
for the years ended December 31, 2005 and 2006:

Year Ended

December 31,

2005

2006

(in thousands)

Salaries, benefits and related
costs

$

3,843

$

5,342

Legal and consulting expenses

1,565

3,356

Stock-based compensation

138

2,708

Other operating expenses

2,214

3,181

Total

$

7,760

$

14,587

General and administrative expenses were $14.6 million for
the year ended December 31, 2006 compared to
$7.8 million for the year ended December 31, 2005, an
increase of $6.8 million. This increase was due primarily
to recognition of $2.7 million in stock-based compensation
expenses following our adoption of SFAS 123R in January
2006, increases in operational headcount, rent for additional
leased office space and a one-time bonus payment to our
employees upon receipt of marketing approval for AMITIZA to
treat chronic idiopathic constipation in adults, as well as
professional fees in connection with our acquisition of the
capital stock of Sucampo Europe and Sucampo Japan.

Selling
and Marketing Expenses

Selling and marketing expenses were $11.1 million for the
year ended December 31, 2006 compared to $295,000 for the
year ended December 31, 2005, an increase of
$10.8 million. This increase was due to costs we incurred
to launch AMITIZA in April 2006 and other selling and marketing
expenses through the remainder of 2006, including costs for
market research and analysis, marketing and promotional
materials, product samples and other costs.

Milestone
Royalties to Related Parties

Milestone royalties to related parties were $1.3 million
for the year ended December 31, 2006 compared to
$1.5 million for the year ended December 31, 2005, a
decrease of $200,000. In the year ended December 31, 2006,
we paid Sucampo AG $1.0 million, reflecting the 5% we owed
them in respect of the $20.0 million development milestone
payment we received from Takeda during that period, and a
$250,000 milestone payment for regulatory approval of
AMITIZA. In the year ended December 31, 2005, we paid
Sucampo AG $1.5 million, reflecting the 5% we owed them in
respect of the $30.0 million development milestone payments
we received from Takeda during that period.

We began to incur product royalty expenses for net sales of
AMITIZA in the second quarter of 2006 following the product
launch of AMITIZA. In the year ended December 31, 2006, we
expensed $1.2 million in product royalties to related
parties.

Non-Operating
Income and Expense

The following table summarizes our non-operating income and
expense for the years ended December 31, 2005 and 2006:

Year Ended

December 31,

2005

2006

(in thousands)

Interest income

$

1,046

$

1,976

Interest expense

(311

)

(90

)

Other income

255

255

Total, net

$

990

$

2,141

Interest income was $2.0 million for the year ended
December 31, 2006 compared to $1.0 million for the
year ended December 31, 2005, an increase of
$1.0 million. The increase was primarily due to an increase
in the funds available for investment as a result of our receipt
of development milestone payments from Takeda in March 2005, May
2005 and January 2006. Interest expense was $90,000 for the year
ended December 31, 2006 compared to $311,000 for the year
ended December 31, 2005, a decrease of $221,000. This
decrease reflected our repayment in full in December 2005 and
June 2006 of related party debt instruments issued by Sucampo
Japan and Sucampo Europe.

Income
Taxes

For the years ended December 31, 2005 and 2006, our
consolidated effective tax rate was 166.7% and (29.0%),
respectively. The change in the effective tax rate for the year
ended December 31, 2006 from the year ended
December 31, 2005 was due primarily to the discrete release
of $4.9 million from the valuation allowance on a portion
of the U.S. deferred tax assets that we believe is more likely
than not to be realized.

Comparison
of years ended December 31, 2004 and December 31,
2005

Revenues

The following table summarizes our revenues for the years ended
December 31, 2004 and 2005:

Year Ended

December 31,

2004

2005

(Restated)

(Restated)

(in thousands)

Research and development revenue

$

2,838

$

38,960

Contract revenue

69

1,000

Collaboration revenue

24

147

Contract revenue 
related parties

411

98

Other income  gain on
sale of patent to related party

497



Total

$

3,839

$

40,205

Total revenues were $40.2 million in 2005 compared to
$3.8 million in 2004, an increase of $36.4 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us relating to AMITIZA.

Research and development revenue was $39.0 million for the
year ended December 31, 2005 compared to $2.8 million
for the year ended December 31, 2004, an increase of
$36.2 million. This increase was primarily due to our
progress in the development of AMITIZA to treat chronic
idiopathic constipation and irritable bowel syndrome with
constipation and the recognition of payments received from
Takeda related to our development work ratably over the
estimated development period, which was previously estimated to
be completed by December 2006. The specific revenue streams
associated with research and development revenue for the years
ended December 31, 2004 and 2005 were as follows:



During the year ended December 31, 2005, we received
$30.0 million of development milestone payments from Takeda
related to our efforts to develop AMITIZA, which are being
recognized as research and development revenue ratably over the
performance period, resulting in $16.2 million of revenue
during 2005. No development milestones were received and
recognized as revenue during the year ended December 31,
2004.



We received $1.5 million and $28.5 million of
reimbursement payments for research and development costs from
Takeda related to our efforts to develop AMITIZA during the
years ended December 31, 2004 and 2005, respectively. We
recognized the full $1.5 million as research and
development revenue during 2004 and are recognizing the
$28.5 million ratably over the development period,
resulting in $14.7 million of research and development
revenue during 2005.



During the year ended December 31, 2004, we received an
up-front payment of $20.0 million from Takeda, of which
$17.6 million was associated with the development of
AMITIZA. This amount is being recognized ratably over the
estimated performance period to develop AMITIZA, resulting in
$1.4 million and $8.1 million of research and
development revenue during the years ended December 31,
2004 and 2005, respectively.

During the year ended December 31, 2005, we received
$30.0 million of development milestone payments and
$28.5 million of reimbursement payments for research and
development costs from Takeda related to our efforts to develop
AMITIZA. Because these amounts were received during 2005, we
recognized a partial year of research and development revenue
for the year ended December 31, 2005. During 2005, we also
received a $20.0 million development milestone payment for
our related efforts to develop AMITIZA, which will be recognized
through the end of the performance period. Total research and
development revenue associated with the development of AMITIZA
to treat chronic idiopathic constipation and irritable bowel
syndrome with constipation was $39.0 million for the year
ended December 31, 2005. In 2004, we did not receive any
development milestone payments.

We recognized contract revenue of $69,000 in 2004 and
$1.0 million in 2005. Contract revenue in 2004 included the
$67,000 we recognized with respect to the terminated ophthalmic
collaboration agreement. Contract revenue in 2005 included
$1.0 million in previously deferred revenue that we
recognized during this period upon the expiration of the option
granted to Takeda for joint development and commercialization
rights for AMITIZA in Asia.

Upon receipt of the $20.0 million
up-front
payment, we deferred $2.4 million to be recognized using
the
time-based
model over the 16-year performance period of our participation
in the committee meetings. During the years ended
December 31, 2004 and 2005, we recognized $24,000 and
$147,000, respectively, of this deferred amount as collaboration
revenue.

We received $411,000 in contract revenue from related parties in
2004, including $324,000 from Sucampo AG for consulting services
and $87,000 from R-Tech for manufacturing and research and
development consulting services. We received $98,000 of contract
revenue from related parties in 2005, reflecting payments from
R-Tech for manufacturing and research and development consulting
services.

In 2004, we also recognized a one-time gain of $497,000 upon the
sale to Sucampo AG of U.S. patents relating to RESCULA. As
a result of declining royalty revenues associated with these
patents, we determined that we would be unable to recover the
original $954,865 purchase price paid for these patents and sold
our rights in them to Sucampo AG.

Total research and development expenses were $31.2 million
in 2005 compared to $14.0 million in 2004, an increase of
$17.1 million. This increase was due primarily to costs
associated with the commencement in May 2005 of two pivotal
Phase III clinical trials of AMITIZA for the treatment of
irritable bowl syndrome with constipation and a related
follow-on safety trial.

In 2005, we incurred $3.4 million in research and
development expenses for services performed by third-party
consultants, whom we compensated by granting stock options at
the time services were rendered. We determined the value of
these options to be $3.4 million, and we recognized the
related expense in full in the period of the grant.

General
and Administrative Expenses

The following summarizes our general and administrative expenses
for the years ended December 31, 2004 and 2005:

Year Ended

December 31,

2004

2005

(in thousands)

Salaries, benefits and related
costs

$

4,160

$

3,843

Legal and consulting expenses

2,131

1,565

Stock-based compensation

68

138

Other operating expenses

1,857

2,214

Total

$

8,216

$

7,760

General and administrative expenses were $7.8 million in
2005 compared to $8.2 million in 2004, a decrease of
$456,000. Stock-based compensation was $138,000 in 2005 compared
to $68,000 in 2004, an increase of $70,000. This increase was
due primarily to a modification in 2005 of the vesting of
previously issued stock options and the resulting stock-based
compensation expense in 2005.

Selling
and Marketing Expenses

Selling and marketing expenses were $295,000 for 2005 compared
to zero for 2004. The expenses in 2005 were primarily
attributable to the following:



the hiring of two members of our senior marketing staff,
consisting of a vice-president of marketing and sales, hired in
September 2005, and a director of marketing, hired in June
2005; and



expenses for market research and analysis conducted in
anticipation of potential marketing approval by the FDA of
AMITIZA for the treatment of chronic idiopathic constipation in
adults.

Milestone
Royalties to Related Parties

During 2005, we paid Sucampo AG $1.5 million reflecting the
5% we owed them in respect of the $30.0 million of
development milestone payments we received from Takeda during
the year. We paid $1.0 million in milestone royalty
payments during 2004 related to the $20.0 million up-front
payment we received from Takeda.

The following table summarizes our non-operating income and
expense for the years ended December 31, 2004 and 2005:

Year Ended

December 31,

2004

2005

(in thousands)

Interest income

$

96

$

1,046

Interest expense

(173

)

(311

)

Other income

21

255

Total, net

$

(56

)

$

990

Interest income was $1.0 million in 2005 compared to
$96,000 in 2004, an increase of $950,000. The increase was
primarily due to an increase in the funds available for
investment as a result of our receipt of development milestone
payments from Takeda of $10.0 million in March 2005 and
$20.0 million in May 2005. We invested these funds in
short-term auction-rate securities. Interest expense was
$311,000 in 2005 compared to $174,000 in 2004, an increase of
$137,000. The increase in other income was due primarily to
foreign currency transaction gains of $248,000 during 2005. This
increase was attributable to increased borrowings under notes to
related parties.

Income
Taxes

The income tax provision was $788,000 for the year ended
December 31, 2005 compared to $0 for the year ended
December 31, 2004. The increase of $788,000 resulted from
taxes payable on income we recognized during the year ended
December 31, 2005 for tax purposes, which we were not able
to offset with tax loss carryforwards or realize through future
carrybacks. Our U.S. tax loss carryforwards were fully
utilized as of December 31, 2005.

Reportable
Geographic Segments

We have determined that we have three reportable geographic
segments based on our method of internal reporting, which
disaggregates business by geographic location. These segments
are the United States, Europe and Japan. We evaluate the
performance of these segments on the basis of income from
operations. The following is a summary of financial information
by reportable segment.

We require cash principally to meet our operating expenses. We
have financed our operations since inception with a combination
of private placements of equity securities, up-front and
milestone payments received from Takeda, R-Tech and the third
party with whom we entered into our discontinued ophthalmic
collaboration, and research and development expense
reimbursements from Takeda. From inception through
March 31, 2007, we had raised net proceeds of
$55.3 million from private equity financings. From
inception through March 31, 2007, we had also received an
aggregate of $110.5 million in up-front, milestone, option
and expense reimbursement payments from third parties. We
operated profitably in the year ended December 31, 2006 and
the three months ended March 31, 2007, principally as a
result of the development milestone payments that we received
from Takeda. As of March 31, 2007, we had cash and cash
equivalents and short-term investments of $45.1 million. We
began receiving cash royalty payments from Takeda for AMITIZA
sales in the quarter ended September 30, 2006.

Cash
Flows

The following table summarizes our cash flows for the years
ended December 31, 2004, 2005 and 2006 and the three months
ended March 31, 2006 and 2007:

Net cash used by operating activities was $6.4 million for
the three months ended March 31, 2007. This reflected net
income of $516,000. We had an increase in accounts receivable of
$1.4 million, primarily related to product royalty revenue
for AMITIZA and co-promotion revenues from Takeda and a decrease
in deferred revenue of $6.2 million. The decrease in
deferred revenue primarily related to the amortization of
deferred research and development revenue over the performance
period of the development of AMITIZA.

Net cash used in investing activities was $99,000 for the three
months ended March 31, 2007. This primarily reflected our
purchases of property and equipment.

Net cash used in financing activities was $361,000 for the three
months ended March 31, 2007. This reflected payments
incurred for our planned initial public offering.

Year
ended December 31, 2006

Net cash used in operating activities was $10.9 million for
the year ended December 31, 2006. This reflected net income
of $21.8 million, which included a non-cash charge of
$3.3 million of stock-based compensation expense. We also
had an increase in accounts receivable of $2.8 million,
primarily related to product royalty revenue for AMITIZA and
co-promotion revenues from Takeda, and a decrease in deferred
revenue of $26.8 million. The decrease in deferred revenue
primarily related to the amortization of deferred research and
development revenue over the performance period of the
development of AMITIZA. The decrease of other liabilities of
$1.5 million was the result of our repayment to Takeda of
$1.5 million for the refundable portion of its option
payment upon the expiration of its option to negotiate
commercialization rights for AMITIZA in Europe, the Middle East
and Africa.

Net cash used in investing activities was $1.4 million for
the year ended December 31, 2006. This reflected our
purchases of auction rate securities and property and equipment
of $2.5 million, offset in part by proceeds received from
sales and maturities of auction rate securities of
$1.3 million.

Net cash provided by financing activities was $17.4 million
for the year ended December 31, 2006. This reflected
$23.9 million in net proceeds raised in a private placement
sale of 282,207 shares of class A common stock,
$1.2 million in funds received from borrowings under
related party debt instruments, $2.9 million of payments
incurred for our planned initial public offering and
$4.8 million of repayments under related party debt
instruments.

Year
ended December 31, 2005 (Restated)

Net cash provided by operating activities was $23.8 million
for the year ended December 31, 2005. This reflected a net
loss of $316,000, an increase in our deferred revenue of
$20.4 million from research and development payments from
Takeda to be amortized over the performance period of the
development of AMITIZA and $3.6 million of non-cash
stock-based compensation charges.

Net cash used in investing activities was $25.5 million for
the year ended December 31, 2005, reflecting our net
purchase of $25.4 million in auction rate securities.

Net cash used in financing activities was $2.3 million for
the year ended December 31, 2005, reflecting our repayment
of related party debt.

Year
ended December 31, 2004 (Restated)

Net cash provided by operating activities was $3.2 million
for the year ended December 31, 2004. This reflected a net
loss of $19.5 million and an increase in our deferred
revenue of $20.4 million arising primarily from an up-front
payment from Takeda, of which $2.4 million is being
recognized over the 16-year period in which we are required to
participate in collaboration committee meetings with Takeda and
$17.6 million is being recognized over the performance
period of our development of AMITIZA.

Net cash used in investing activities was $3.0 million for
the year ended December 31, 2004, reflecting our purchase
of auction rate securities.

Net cash provided by financing activities was $2.3 million
for the year ended December 31, 2004, reflecting funds
received from borrowings under related party debt instruments.

Commitments
and Contingencies

As of March 31, 2007, our principal outstanding contractual
obligations related to our office leases in Bethesda, Maryland,
England and Japan. The following table summarizes these
significant contractual obligations at December 31 for the
indicated year:

2007

2008

2009

2010

2011

Thereafter

Total

(in thousands)

Contractual
obligations:

Operating leases

$

829

$

1,429

$

1,321

$

969

$

938

$

5,159

$

10,645

The above table does not include:



Contingent milestone and royalty obligations under our license
agreement with Sucampo AG. These obligations are described in
more detail above, and include obligations to pay
Sucampo AG:



5% of every milestone payment we receive from a sublicensee;



$500,000 upon initiation of the first Phase II clinical trial
for each compound in each of the three territories covered by
the license;



$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories; and



royalty payments ranging from 2.1% to 6.5% of net sales of
products covered by patents licensed to us by Sucampo AG.



Our share of research and development costs for AMITIZA. As of
March 31, 2007, we had incurred $11.0 million of these
costs. We expect to incur $2.0 million of additional costs
in connection with the development of AMITIZA for the treatment
of irritable bowel syndrome with constipation and expect to
incur approximately $2.0 million of additional costs in
connection with the development of AMITIZA for other
indications, such as the treatment of opioid-induced bowel
dysfunction, which will not be reimbursed by Takeda.



Expenses under agreements with contract research organizations
for clinical trials of our product candidates. The timing and
amount of these disbursements are based on a variety of factors,
such as the achievement of specified milestones, patient
enrollment, services rendered or the incurrence of expenses by
the contract research organization. As a result, we must
reasonably estimate the potential timing and amount of these
payments. We estimate our current commitments to contract
research organizations at March 31, 2007 to be
$2.6 million for the nine months ending December 31,
2007.

In addition, the FDA has required us to perform two
post-marketing studies to evaluate the safety of AMITIZA in
patients with renal impairment and patients with hepatic
impairment. Under our collaboration agreement with Takeda, the
costs for these studies will be shared 70% by Takeda and 30% by
us. We do not anticipate our portion of these expenses will
exceed $5.0 million.

In addition to our normal operating expenses, we estimate that
our specific funding requirements through the first half of 2008
will include:



Up to $1.0 million to fund our 30% share of the two
post-marketing studies of AMITIZA to evaluate its safety in
patients with renal impairment and patients with hepatic
impairment. We initiated these studies in January 2007.



Approximately $18.0 million to fund development and
regulatory activities for SPI-8811 and SPI-017, which we expect
will enable us to substantially complete at least the following
development efforts:



a Phase II clinical trial of SPI-8811 for the prevention and
treatment of NSAID-induced ulcers, which we plan to commence in
the third quarter of 2007;



a Phase II
proof-of-concept
study of SPI-8811 in patients with portal hypertension, which we
plan to commence in 2007;



a Phase II clinical trial of SPI-8811 in patients with cystic
fibrosis, which we plan to commence by the second quarter of
2008; and



Phase I clinical trials of an intravenous formulation of SPI-017
for peripheral arterial and vascular disease and stroke, which
we plan to commence in 2008;



Up to $12.0 million to fund the expansion of our
commercialization activities in the United States and the
initiation of commercialization efforts in non-U.S. markets;



Up to $1.0 million to fund regulatory efforts by Sucampo
Europe and Sucampo Japan for AMITIZA and SPI-8811;



Up to $6.0 million for research and development activities
for prostone compounds other than AMITIZA, SPI-8811 and SPI-017;



Up to $1.0 million to fund costs in connection with
computers, software and information technology to support growth
in our business.

Takeda will fund 100% of the Phase IV clinical trials of
AMITIZA for the treatment of chronic idiopathic constipation in
pediatric patients that we initiated in January 2007.

We believe that the net proceeds from this offering, together
with our existing cash and cash equivalents and internally
generated funds from AMITIZA product sales, will be sufficient
to enable us to fund our operating expenses for the foreseeable
future. We have based this estimate on assumptions that may
prove to be wrong. There are numerous risks and uncertainties
associated with AMITIZA product sales and with the development
and commercialization of our product candidates. Our future
capital requirements will depend on many factors, including:



the level of AMITIZA product sales;



the scope, progress, results and costs of preclinical
development and laboratory testing and clinical trials for our
product candidates;



the costs, timing and outcome of regulatory review of our
product candidates;



the number and development requirements of other product
candidates that we pursue;



the costs of commercialization activities, including product
marketing, sales and distribution;

changes in our business plan as a result of changes in the
market conditions resulting from withdrawal or approval of
competing products, such as recently occurred when Novartis
withdrew Zelnorm from the U.S. market.

In particular, we could require external sources of funds for
acquisitions that we determine to make in the future.

To the extent that our capital resources are insufficient to
meet our future capital requirements, we will need to finance
our future cash needs through public or private equity
offerings, debt financings or corporate collaboration and
licensing arrangements. Except for development funding by
Takeda, we do not currently have any commitments for future
external funding.

Additional equity or debt financing, grants or corporate
collaboration and licensing arrangements may not be available on
acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our
planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require us to
relinquish rights to certain product candidates that we might
otherwise seek to develop or commercialize independently. In
addition, any future equity funding may dilute the ownership of
our equity investors.

Related
Party Transactions

Under our license agreement with our affiliate Sucampo AG, we
are required to make specified milestone and royalty payments.
We estimated the fair value of this arrangement based upon
like-kind third-party evidentiary matter for the transaction.
When we entered into this agreement, we performed an economic
analysis of the transaction to ensure that we were receiving a
return on our investment equivalent to that of other
pharmaceutical companies. In addition, we performed a transfer
pricing study and economic analysis to provide evidence that the
agreement did not conflict with taxing guidelines.

Under our exclusive supply agreement with R-Tech, R-Tech made
milestone payments to us totaling $6.0 million during 2004
and we recorded the full amount as deferred revenue. We first
began to recognize these payments as revenue during the quarter
ended June 30, 2006 and will continue to recognize them
ratably through 2020. When we entered into this agreement, we
evaluated the net present value of the supply agreement, based
upon anticipated cash flows from the successful development and
commercialization of the compounds it covers, to determine the
current value of the transaction. Additionally, we performed a
transfer pricing study and economic analysis to provide evidence
the agreement did not conflict with taxing guidelines.

For information regarding additional related party transactions,
see notes 8 and 9 to our consolidated financial statements
appearing at the end of this prospectus.

Changes in the application of domestic or foreign taxing
regulations and interpretation of related party transactions
with foreign entities could affect the extent to which taxing
authorities agree that these transactions are on an arms
length basis.

Quantitative
and Qualitative Disclosures About Market Risk

Our exposure to market risk is currently confined to our cash
and cash equivalents and investments in auction-rate securities.
We currently do not hedge interest rate exposure. We have not
used derivative financial instruments for speculative or trading
purposes. Because of the short-term maturities of our cash and
cash equivalents, we do not believe that an increase in market
rates would have any significant impact on the realized value of
our investments.

Effects
of Inflation

Our most liquid assets are cash, cash equivalents and short-term
investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheets. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to

use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the
rate at which we use our resources.

Effects
of Foreign Currency

We currently incur a portion of our operating expenses in the
United Kingdom and Japan. The reporting currency for our
consolidated financial statements is U.S. Dollars. As such,
our results of operations could be adversely effected by changes
in exchange rates either due to transaction losses, which are
recognized in the statement of operations, or translation
losses, which are recognized in comprehensive income. We
currently do not hedge foreign exchange rate exposure.

Off
Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities.

Accounting
Pronouncements

In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS 123R, which requires companies to expense
the estimated fair value of employee stock options and similar
awards. SFAS 123R replaces SFAS 123 and supersedes
APB 25. In March 2005, the Securities and Exchange
Commission, or SEC, issued SAB Bulletin No. 107,
Share-Based Payments, or SAB 107, which
generally provides the SEC staffs views regarding
SFAS 123R. SAB 107 provides guidance on how to
determine the expected volatility and expected term inputs into
a valuation model used to determine the fair value of
share-based payments. SAB 107 also provides guidance
related to numerous aspects of the adoption of SFAS 123R
such as income taxes, capitalization of compensation costs,
modification of share-based payments prior to adoption and the
classification of expenses. We have applied the principles of
SAB 107 in conjunction with our adoption of SFAS 123R.

As of January 1, 2006, we adopted the provisions of
SFAS 123R using a prospective transition method. There was
no impact to our consolidated financial statements as a result
of this adoption as of January 1, 2006. Under the
prospective transition method, SFAS 123R, which provides
changes to the methodology for valuing share-based compensation
among other changes, will apply to new awards and to awards
outstanding on the effective date that are subsequently modified
or cancelled.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement
No. 3, or SFAS 154. This statement replaces
APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle and requires
retrospective application to prior periods financial
statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. This statement also
requires that a change in depreciation, amortization or
depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate affected by a
change in accounting principle. This statement is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of
SFAS 154 as of January 1, 2006 did not have a material
effect on our consolidated financial statements.

In November 2005, the FASB Staff issued FASB Staff Position, or
FSP,
FAS 115-1,The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
or FSP
FAS 115-1.
FSP
FAS 115-1
addresses the determination as to when an investment is
considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP
also includes accounting considerations subsequent to the
recognition of
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as
other-than-temporary
impairments. The guidance in this FSP amends FASB Statements
No. 115, Accounting for Certain Investments in
Debt and

Equity Securities, and No. 124,
Accounting for Certain Investments Held by
Not-for-Profit
Organizations, and APB Opinion No. 18,
The Equity Method of Accounting for Investments in
Common Stock. The guidance in this FSP must be applied
to reporting periods beginning after December 15, 2005. The
adoption of FSP
FAS 115-1
as of January 1, 2006 did not have a material effect on our
consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48, which is effective as of the interim reporting
period beginning January 1, 2007. The validity of any tax
position is a matter of tax law, and generally there is no
controversy about recognizing the benefit of a tax position in a
companys financial statements when the degree of
confidence is high that the tax position will be sustained upon
examination by a taxing authority. The tax law is subject to
varied interpretation, however, and whether a tax position will
ultimately be sustained may be uncertain. Under FIN 48, the
impact of an uncertain income tax position on the income tax
provision must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being
sustained. FIN 48 also requires additional disclosures
about unrecognized tax benefits associated with uncertain income
tax positions and a reconciliation of the change in the
unrecognized benefit. In addition, FIN 48 requires interest
to be recognized on the full amount of deferred benefits for
uncertain tax positions. An income tax penalty is recognized as
expense when the tax position does not meet the minimum
statutory threshold to avoid the imposition of a penalty. The
adoption of FIN 48 as of January 1, 2007 did not have an
impact on our consolidated financial statements.

In September 2006, the FASB Staff issued FASB Statement
No. 157, Fair Value Measurements, or
SFAS 157, which addresses how companies should measure fair
value when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted
accounting principles. The FASB believes that the new standard
will make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. We will
be required to adopt SFAS 157 for fiscal years beginning
after November 15, 2007, and interim periods within those
fiscal years. We are assessing SFAS 157, but we currently
do not believe it will have a material impact on our
consolidated financial statements.

In September 2006, the SEC Staff issued SAB No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 provides
guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the
purpose of determining whether the current years financial
statements are materially misstated. SAB 108 will be
effective for our consolidated financial statements in the
fourth quarter of 2006. We evaluated the requirements of
SAB 108 and concluded that its adoption did not have a
material effect on our consolidated financial statements.

In February 2007, the FASB Staff issued FASB Statement
No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS 159,
which provides entities with the opportunity to measure certain
financial instruments at fair value. We will be required to
adopt SFAS 159 for the year beginning January 1, 2008.
We do not believe SFAS 159 will have a material impact on
our future consolidated financial statements.

Internal
Control Over Financial Reporting

In connection with the acquisition of Sucampo Europe and Sucampo
Japan and our preparation of audited financial information for
those two entities for the year ended December 31, 2005, we
identified control deficiencies relative to those entities that
constitute material weaknesses in the design and operation of
our internal control over financial reporting.

In general, a material weakness is defined as a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
annual or interim financial statements will not be prevented or
detected. The material weaknesses we identified are as follows:



We did not maintain effective controls over the completeness and
accuracy of revenue recognition. Specifically, effective
controls were not designed and in place to adequately review
contracts for the

accuracy and proper cut-off of revenue recognition at Sucampo
Europe and Sucampo Japan. This control deficiency resulted in
adjustments to the revenue and deferred revenue accounts.
Additionally, this control deficiency could result in a
misstatement of the revenue and deferred revenue accounts that
would result in a material misstatement to our interim or annual
financial statements that would not be prevented or detected.



We did not maintain effective controls over the completeness and
accuracy of the accounting for debt instruments. Specifically,
effective controls were not designed and in place to adequately
review debt agreements of Sucampo Europe and Sucampo Japan for
the proper accounting implications, or to ensure appropriate
communication within our company regarding the existence of all
debt agreements. This control deficiency resulted in
adjustments to accounts payable, other liabilities and notes
payable accounts. Additionally, this control deficiency could
result in a misstatement of accounts payable, other liabilities
and notes payable accounts that would result in a material
misstatement to our interim or annual financial statements that
would not be prevented or detected.



We did not maintain effective controls over the preparation,
review and presentation of the financial information prepared in
accordance with U.S. generally accepted accounting principles
reflecting Sucampo Europe and Sucampo Japan operations.
Specifically, effective controls were not designed and in place
to adequately review, analyze and monitor these affiliates
financial information, nor did we have a standard reporting
format for these affiliates, accounting procedures and policies
manuals, formally documented controls and procedures or a formal
process to review and analyze financial information of these
affiliates. This control deficiency resulted in adjustments to
revenue, deferred revenue, accounts payable, accrued expenses,
other liabilities and notes payable accounts, as well as the
statement of cash flows. Additionally, this control deficiency
could result in a misstatement in a number of our financial
statement accounts, including the statement of cash flows,
resulting in a material misstatement to our interim or annual
financial statements that would not be prevented or detected.

Sucampo Europe and Sucampo Japan collectively accounted for 2.7%
of our total revenues in the year ended December 31, 2006
and 0.1% of our total revenues for the three months ended
March 31, 2007.

In connection with the restatement of our consolidated financial
statements as of and for the year ended December 31, 2005
for errors in our deferred tax assets and our accounting for
fully vested options granted, we identified additional control
deficiencies that constitute material weaknesses in the design
and operation of our internal controls over financial reporting.
In particular:



We did not maintain effective controls over the completeness,
accuracy and valuation of accounting for certain income tax
balances. Specifically, effective controls were not designed and
in place to periodically assess, at an appropriate level of
detail, the more likely than not criteria for
recognition of deferred tax assets. This control deficiency
resulted in adjustments to the deferred tax asset valuation
allowance and the income tax provision accounts, which resulted
in a restatement of our consolidated financial statements as of
and for the year ended December 31, 2005 and for the three
months ended March 31, 2006. Additionally, this control
deficiency could result in a misstatement of the deferred tax
asset valuation allowance and income tax provision accounts that
would result in a material misstatement to our interim or annual
financial statements that would not be prevented or detected.



We did not maintain effective controls over the valuation and
accuracy of accounting for non-employee stock options.
Specifically, effective controls were not designed and in place
to value the options using the contractual term as opposed to an
expected term. This control deficiency resulted in adjustments
to the research and development expenses and additional paid-in
capital accounts and resulted in a restatement of our financial
statements as of and for the year ended December 31, 2005.
Additionally, this control deficiency could result in a
misstatement of operating expenses and additional paid-in
capital accounts that would result in a material misstatement to
our interim or annual financial statements that would not be
prevented or detected.

We have taken steps to remediate the material weaknesses in the
areas of maintaining effective controls over the completeness
and accuracy of revenue recognition and accounting for debt
instruments at Sucampo

Europe and Sucampo Japan, the completeness, accuracy and
valuation of accounting for income tax balances, and the
valuation and accuracy of accounting for non-employee stock
options, including the implementation of the following controls
and processes:



transferring the authority to execute agreements and incur
indebtedness from Sucampo Europe and Sucampo Japan to our
headquarters;



establishing and implementing formal processes for analyzing and
approving accounting for contracts and debt agreements;



establishing formal controls for review of the accuracy and
proper cut-off of revenue recognition and accrued expenses at
Sucampo Europe and Sucampo Japan to be completed at our
headquarters;



hiring a third-party tax consultant to assist in our calculation
and evaluation of our annual and interim income tax accounting,
including the deferred tax asset valuation allowance and
provision accounts; and



hiring a third-party specialist to assist in the calculation of
the fair value of all non-employee equity awards granted.

We have not yet fully remediated the material weaknesses in the
area of effective controls over the preparation, review and
presentation of financial information prepared in accordance
with U.S. generally accepted accounting principles reflecting
Sucampo Europes and Sucampo Japans operations. If we
are unable to remediate this material weakness, we may not be
able to accurately and timely report our financial position,
results of operations or cash flows as a public company.
Becoming subject to the public reporting requirements of the
Securities Exchange Act of 1934, or the Exchange Act, upon the
completion of this offering will intensify the need for us to
report our financial position, results of operations and cash
flows on an accurate and timely basis.

We have concluded that the control deficiency that resulted in
the restatement of the consolidated financial statements for the
years ended December 31, 2004 and 2005 as a result of the
revenue recognition error did not constitute a material weakness
because management determined that there were controls designed
and in place to prevent or detect a material misstatement and,
therefore, the likelihood of revenue being materially misstated
is not more than remote.

The process of improving our internal controls has required and
will continue to require us to expend significant resources to
design, implement and maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a
public company. There can be no assurance that any actions we
take will be successful. We will continue to evaluate the
effectiveness of our disclosure controls and procedures and
internal control over financial reporting on an on-going basis.

We are an emerging pharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
The therapeutic potential of prostones was first identified by
one of our founders, Dr. Ryuji Ueno. We believe that most
prostones function as activators of cellular ion channels and,
as a result, may be effective at promoting fluid secretion and
enhancing cell protection, which may give them wide-ranging
therapeutic potential, particularly for age-related diseases. We
are focused on developing prostones with novel mechanisms of
action for the treatment of gastrointestinal, respiratory,
vascular and central nervous system diseases and disorders for
which there are unmet or underserved medical needs and
significant commercial potential.

In January 2006, we received marketing approval from the
U.S. Food and Drug Administration, or FDA, for our first
product,
AMITIZA®
(lubiprostone), for the treatment of chronic idiopathic
constipation in adults of all ages. AMITIZA is the only
prescription product for the treatment of chronic idiopathic
constipation that has been approved by the FDA for use by adults
of all ages, including those over 65 years of age, and that
has demonstrated effectiveness for use beyond 12 weeks.
Constipation becomes chronic when a patient suffers specified
symptoms for more than 12 non-consecutive weeks within a
12-month
period and is idiopathic if it is not caused by other diseases
or by use of medications. Studies published in The American
Journal of Gastroenterology estimate that approximately
42 million people in the United States suffer from
constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.

We are party to a collaboration and license agreement with
Takeda Pharmaceutical Company Limited, or Takeda, to jointly
develop and commercialize AMITIZA for chronic idiopathic
constipation, irritable bowel syndrome with constipation,
opioid-induced bowel dysfunction and other gastrointestinal
indications in the United States and Canada. We have the right
to co-promote AMITIZA along with Takeda in these markets.
We and Takeda initiated commercial sales of AMITIZA in the
United States for the treatment of chronic idiopathic
constipation in April 2006. Takeda is marketing AMITIZA broadly
to office-based specialty physicians and primary care
physicians. We are complementing Takedas marketing efforts
by promoting AMITIZA through a specialty sales force in the
institutional marketplace, including specialist physicians based
in academic medical centers and long-term care facilities. This
institutional market is characterized by a concentration of
elderly patients, who we believe will be a key market for
AMITIZA to treat gastrointestinal indications, and by physicians
who are key opinion leaders in the gastrointestinal field. We
have performed all of the development activities with respect to
AMITIZA and Takeda has funded a portion of the cost for these
activities. We have retained the rights to develop and
commercialize AMITIZA outside the United States and Canada and
to develop and commercialize it in the United States and Canada
for indications other than gastrointestinal indications.

We also plan to pursue marketing approval for AMITIZA for
additional constipation-related gastrointestinal indications
with large, underserved markets. We recently completed two
pivotal Phase III clinical trials and a long-term safety
trial of AMITIZA for the treatment of irritable bowel syndrome
with constipation. In these trials, AMITIZA improved overall
relief from symptoms associated with irritable bowel syndrome
with constipation with statistical significance and was well
tolerated. Based upon the results of these trials, we submitted
a supplement to our existing new drug application, or NDA, for
AMITIZA to the FDA in June 2007 seeking marketing approval for
AMITIZA for the treatment of this indication. In addition, we
plan to commence Phase III pivotal clinical trials of
AMITIZA for the treatment of opioid-induced bowel dysfunction

in the third quarter of 2007. According to the American College
of Gastroenterology, irritable bowel syndrome affects
approximately 58 million people in the United States, with
irritable bowel syndrome with constipation accounting for
approximately one-third of these cases. We also plan to pursue
marketing approval for AMITIZA in Europe and the Asia-Pacific
region for appropriate gastrointestinal indications based on
local market disease definitions and the reimbursement
environment.

In addition, we are developing other prostone compounds for the
treatment of a broad range of diseases. The most advanced of
these programs are:



SPI-8811 (cobiprostone) for the treatment of ulcers induced by
non-steroidal anti-inflammatory drugs, or NSAIDs, portal
hypertension, non-alcoholic fatty liver disease, disorders
associated with cystic fibrosis and chronic obstructive
pulmonary disease. We have completed Phase I clinical
trials of SPI-8811 in healthy volunteers and plan to commence a
Phase II clinical trial of this product candidate for the
treatment of NSAID-induced ulcers in the third quarter of 2007.
We also plan to commence a Phase II
proof-of-concept
study of SPI-8811 in patients with portal hypertension in 2007.



SPI-017 for the treatment of peripheral arterial and vascular
disease and central nervous system disorders. Initially, we are
working on the development of an intravenous formulation of
SPI-017 for the treatment of peripheral arterial disease. We
also are developing an oral formulation of SPI-017 for the
treatment of Alzheimers disease. We plan to commence
Phase I clinical trials of the intravenous formulation of
SPI-017 and Phase I clinical trials of the oral formulation
in 2008.

We hold an exclusive worldwide royalty-bearing license from
Sucampo AG, a Swiss patent-holding company, to develop and
commercialize AMITIZA and other prostone compounds covered by
patents and patent applications held by Sucampo AG. We are
obligated to assign to Sucampo AG all patentable improvements
that we make in the field of prostones, which Sucampo AG will in
turn license back to us on an exclusive basis. If we have not
committed specified development efforts to any prostone compound
other than AMITIZA, SPI-8811 and SPI-017 by the end of a
specified period, which ends on the later of June 30, 2011
or the date upon which Drs. Kuno and Ueno no longer control
our company, then the commercial rights to that compound will
revert to Sucampo AG, subject to a 15-month extension in the
case of any compound that we designate in good faith as planned
for development within that extension period.

We are party to exclusive supply arrangements with
R-Tech Ueno,
Ltd., or
R-Tech, a
Japanese pharmaceutical manufacturer, to provide us with
clinical and commercial supplies of AMITIZA and clinical
supplies of our product candidates SPI-8811 and SPI-017. These
arrangements include provisions requiring
R-Tech to
assist us in connection with applications for marketing approval
for these compounds in the United States and elsewhere,
including assistance with regulatory compliance for chemistry,
manufacturing and controls. Drs. Ueno and Kuno together,
directly or indirectly, own all of the stock of Sucampo AG and a
majority of the stock of
R-Tech.
Drs. Kuno and Ueno are considering plans to reduce their
equity ownership in
R-Tech.

The table below summarizes the development status of AMITIZA and
our key product candidates. We currently hold all of the
commercialization rights to the prostone compounds in our
product pipeline, other than for commercialization of AMITIZA in
the United States and Canada, which is covered by our
collaboration and license agreement with Takeda.

Product/ Product

Candidate

Target Indication

Development Phase

Next Milestone

AMITIZA

Chronic idiopathic constipation
(adult)

Marketed



Chronic idiopathic constipation
(pediatric)

Phase IV pediatric trial
ongoing



Irritable bowel syndrome with
constipation

Supplemental NDA filed

FDA marketing approval

Opioid-induced bowel dysfunction

Planning Phase III pivotal
trial

Phase III pivotal trial
planned to commence in the third quarter of 2007

SPI-8811

Gastrointestinal

Non-steroidal anti-

Phase I testing

Phase II trial planned

inflammatory drug

completed

to commence in the third

(NSAID) induced ulcers

quarter of 2007

Cystic
fibrosis 
gastrointestinal disorders
(oral formulation)

Phase II trial completed

Phase II dose-ranging trial
planned to commence in 2008

Liver

Portal hypertension

Preclinical testing completed

Phase II
proof-of-concept
study planned to commence in 2007

Non-alcoholic fatty
liver
disease

Phase II trial completed

Pending availability of new
diagnostic tool

Pulmonary

Cystic
fibrosis  respiratory
symptoms (inhaled
formulation)

Preclinical

Finalize inhaled formulation

Chronic obstructive
pulmonary disease

Preclinical

SPI-017

Peripheral arterial and vascular disease

Stroke

Preclinical

Preclinical

Phase I trials of intravenous
formulation planned to commence in 2008*

Alzheimers disease

Preclinical

Phase I trials of oral
formulation planned to commence in 2008*

* Results from Phase I
trials of both intravenous and oral formulations may be useful
in development of any of these indications.

Scientific
Background of Prostones

Prostones are a class of compounds derived from functional fatty
acids that occur naturally in the human body. The therapeutic
potential of prostones was first identified by Dr. Ueno.
Fatty acids serve as fuel for energy production in cells in many
organisms and are intermediates in the synthesis of other
important

chemical compounds. To date, two prostone products have received
marketing approval: AMITIZA for the treatment of chronic
idiopathic constipation and
RESCULA®
(unoprostone isopropyl) for the treatment of glaucoma. RESCULA,
which was developed by R-Tech under the leadership of
Drs. Ueno and Kuno, was the first commercially available
prostone drug. RESCULA was first sold in Japan beginning in 1994
and is currently marketed in more than 40 countries worldwide.
Although we do not hold any rights to RESCULA, we believe that
the successful development of AMITIZA and RESCULA demonstrates
the initial therapeutic potential of prostones.

Ion
Channel Activation

Based on our preclinical and clinical studies, we believe that
most prostones work as selective ion channel activators, which
means that they promote the movement of specific ions into or
out of cells. Ions are charged particles, such as sodium,
potassium, calcium and chloride. The concentration of specific
ions within particular types of cells is important to many vital
physiological functions in the human body. Because ions cannot
move freely across cell membranes, they must enter or exit a
cell through protein structures known as ion channels. Ion
channels, which are found in every cell in the body, span the
cell membrane and regulate the flow of ions into and out of
cells by opening and closing in response to particular stimuli.
Each kind of ion moves through its own specific ion channel.
Some molecular compounds, including some prostones, have been
shown to activate or inhibit ion channels, thereby controlling
the concentration of specific ions within cells. We believe that
these prostones work selectively on specific ion channels and,
as a result, can be targeted to induce very specific
pharmacological activities without triggering other cellular
activity that could lead to undesirable side effects.

In preclinical in vitro tests on human cell lines
with the three prostones that we are currently developing,
AMITIZA, SPI-8811 and SPI-017, all three compounds selectively
activated a specific ion channel known as the type-2 chloride
channel, or ClC-2 channel. The ClC-2 channel is expressed in
cells throughout the body and is one of the channels through
which chloride ions move into and out of cells. Chloride
channels regulate many essential physiological functions within
cells, including cell volume, intracellular pH, cellular water
and ion balance and regulation of cellular voltage and energy
levels. We believe that AMITIZA is the first selective chloride
channel activator approved by the FDA for therapeutic use in
humans.

Potential
Beneficial Effects of Prostones

We believe that the method of action of prostones that serve as
selective ion channel activators may result in the following
beneficial effects:



Enhancement of Fluid Secretion. Activating the
movement of specific ions into and out of cells can promote the
secretion of fluid into neighboring areas. For example, AMITIZA
promotes fluid secretion into the small intestine by activating
the ClC-2 channel in the cells lining the small intestine.
Likewise, RESCULA is a potassium channel activator that works to
treat glaucoma by increasing aqueous humor outflow in ocular
cells in the eyes.



Recovery of Barrier Function. Disruption of
the barrier function in human cells can trigger cell damage by
increasing the permeability of cells and tissue, thereby
diminishing the bodys first line of defense. Recently,
protein complexes occurring between cells known as tight
junctions have been found to play a critical role in the
regulation of barrier function in the body. The ClC-2 channel
plays an important role in the restoration of these tight
junction complexes and in the recovery of barrier function in
the body. In preclinical studies, AMITIZA appeared to accelerate
the recovery of the disrupted barrier function through the
restoration of the tight junction structure. We believe that
this may be a result of AMITIZAs specific effects on the
ClC-2 channel. We believe that other prostones that act as ClC-2
channel activators may have a similar barrier recovery function.



Localized Activity. Because most prostones act
through contact with cells, their pharmacological activity is
localized in those areas where the compound is physically
present in its active form. Because some prostones metabolize
relatively quickly to an inactive form, we believe their
pharmacological effects are not spread to other parts of the
body. These properties allow some prostones to be targeted

to specific types of cells in specific organs through different
routes of administration. For example, when AMITIZA is taken
orally, it arrives in the small intestine and liver while it is
still active and begins to act on the cells lining those organs.
By the time it is passed through to the large intestine, it
appears to have been largely metabolized and is no longer
active. Similarly, we believe that inhaled formulations of some
prostones would act principally in the lungs and intravenous
formulations would act principally in the vascular system, in
each case without having systemic effects.

Our
Strategy

Our goal is to become a leading pharmaceutical company focused
on discovering, developing and commercializing proprietary drugs
based on prostones to treat diseases and disorders for which
there are unmet or underserved medical needs and significant
commercial potential. Our strategy to achieve this objective
includes the following key elements:

Focus on commercial sales of AMITIZA in the United States
for the treatment of chronic idiopathic constipation in
adults. We initiated commercial sales of
AMITIZA in the United States for the treatment of chronic
idiopathic constipation in collaboration with Takeda in April
2006. Takeda is marketing AMITIZA broadly to office-based
specialty physicians and primary care physicians. Pursuant to
the terms of our collaboration and license agreement with
Takeda, Takeda is obligated to provide a dedicated sales force
of at least 200 people to promote AMITIZA and a supplemental
sales force of at least 500 people to promote AMITIZA together
with one other drug product, although Takeda has advised us that
their supplemental sales force currently consists of over 700
people. We are complementing Takedas marketing efforts by
promoting AMITIZA in the institutional marketplace through a
specialty sales force consisting of 38 field sales
representatives. This institutional market is characterized by a
concentration of elderly patients, who we believe will be a key
market for AMITIZA to treat gastrointestinal indications, and by
physicians who are key opinion leaders in the gastrointestinal
field. In connection with the commercial launch of AMITIZA, we
have recruited experienced internal sales and marketing
leadership and developed a marketing strategy and promotional
materials for the commercialization of AMITIZA in our targeted
institutional market.

Develop AMITIZA for the treatment of additional
indications and discover, develop and commercialize other
prostone product candidates. We are
concentrating our development efforts on expanding the approved
indications for AMITIZA and developing our product candidates
SPI-8811 and
SPI-017. We
hold an exclusive worldwide royalty-bearing license from Sucampo
AG to develop and commercialize each of these prostone
compounds. In the future, we also expect to develop other
proprietary prostones. We believe that our focus on prostones
may offer several potential advantages, including:



Novel mechanisms of action. We believe that
AMITIZA,
SPI-8811 and
SPI-017
have, and that additional product candidates that we may develop
in the future based on prostones may have, novel mechanisms of
action, such as selective
ClC-2
chloride channel activation, that offer physicians a new
approach to treatment of targeted indications.



Wide-ranging therapeutic potential of
prostones. We believe that many prostones promote
fluid secretion, enhance cell barrier protection and can be
developed to target particular organs or systems of the body. As
a result, we believe that we will be able to develop prostone
drugs to treat multiple diseases and disorders of the
gastrointestinal, respiratory, vascular and central nervous
systems.



Our discovery and development experience with
prostones. We expect that our considerable
experience with AMITIZA, as well as the knowledge gained by
Drs. Ueno and Kuno in the development of RESCULA, will
facilitate our discovery and clinical development of additional
prostone compounds.



Patent protection. AMITIZA, SPI-8811 and
SPI-017 each are covered by
composition-of-matter,
method of use and other issued patents or patent applications in
the United States, Europe and Japan.

Target large and underserved markets, with a particular
focus on treating indications in the elderly
population. We believe that drugs based on
prostones may be able to address a variety of large markets
characterized either by treatments with limited effectiveness
or, in some cases, no treatment. In addition to

SPI-017 for the treatment of peripheral arterial disease, stroke
and Alzheimers disease.

Seek marketing approval for AMITIZA and our other product
candidates outside the United States. We plan
to pursue marketing approval for AMITIZA and our other product
candidates in markets outside the United States, including
Europe, the Asia Pacific region and Latin America. To the extent
possible, we intend to use the data from our U.S. clinical
trials and the experience gained from the U.S. approval
process to expedite the approval process in other countries. If
we receive marketing approval for our products outside the
United States, we plan to retain co-commercialization rights and
work with third-party pharmaceutical companies with marketing,
sales and distribution capabilities in the relevant regions to
commercialize these products.

Focus on our core discovery and clinical development and
commercialization activities. Our business
model is to devote our resources and efforts to discovering,
developing and commercializing product candidates based on
prostones, while outsourcing other, non-core business functions
to third parties. Following this approach, we selectively
collaborate with a number of third parties to assist us with
these non-core business functions. These collaborators include:



Our affiliate R-Tech, which manufacturers commercial and
clinical supplies of AMITIZA and other prostone compounds for us;



Takeda, with whom we are collaborating to market AMITIZA for the
treatment of chronic idiopathic constipation in adults and other
gastrointestinal indications in the United States and
Canada; and



Contract research organizations, whom we engage to perform
preclinical and clinical trials of our product candidates.

We believe that applying our resources in this way allows us to
concentrate on our core strengths while benefiting from the
specialized expertise of our third-party collaborators. In
addition, we may decide to outsource clinical development
activities for some of the compounds and indications in our
product pipeline if we determine it would be more cost-effective
to do so. For example, we may conclude that it is more
economical to license SPI-8811 for pulmonary indications, such
as respiratory symptoms of cystic fibrosis and chronic
obstructive pulmonary disease, to a third party who would
conduct the necessary clinical development activities in support
of those indications.

Grow through strategic acquisitions and in-licensing
opportunities. We intend to pursue strategic
acquisitions and in-licensing opportunities to complement our
existing product pipeline. We have a specialty sales and
marketing function focused on the institutional market and we
have significant experience in pharmaceutical research and
product development, including clinical trials and regulatory
affairs. We believe that the institutional focus of our
specialty sales force would facilitate our ability to sell
additional products targeted at a variety of indications in
several therapeutic fields that are concentrated in the
institutional setting. This institutional market is
characterized by a concentration of elderly patients. We believe
that these capabilities will help us to identify attractive
acquisition, in-licensing and co-promotion opportunities to
build upon our core clinical development and commercialization
capabilities.

We are developing AMITIZA for the treatment of multiple
constipation-related gastrointestinal disorders. AMITIZA
functions as a selective activator of the ClC-2 chloride channel
through which negatively charged chloride ions flow out of the
cells lining the small intestine and into the intestinal cavity.
As these negatively charged chloride ions enter the intestine,
positively charged sodium ions move through spaces between the
cells into the intestine to balance the negative charge of the
chloride ions. As these sodium ions move into the intestine,
water is also allowed to pass into the intestine through these
spaces between the cells. We believe that this movement of water
into the small intestine promotes increased fluid content, which
in turn softens the stool and facilitates its movement, or
motility, through the intestine.

Chronic
Idiopathic Constipation

On January 31, 2006, after a
10-month
review, the FDA approved our new drug application, or NDA, for
AMITIZA for the treatment of chronic idiopathic constipation in
adults of both genders and all ages, including those over
65 years of age, without restriction as to duration of use.
In collaboration with Takeda, we initiated commercial sales of
AMITIZA in the United States for the treatment of chronic
idiopathic constipation in April 2006. When used for this
indication, AMITIZA gelatin capsules are taken orally twice
daily in doses of 24 micrograms each.

Disease Overview. Constipation is
characterized by infrequent and difficult passage of stool and
becomes chronic when a patient suffers specified symptoms for
over 12 non-consecutive weeks within a
12-month
period. Chronic constipation is idiopathic if it is not caused
by other diseases or by use of medications. Symptoms of chronic
idiopathic constipation include straining, hard stools, bloating
and abdominal pain or discomfort. Factors contributing to the
development of chronic idiopathic constipation include a diet
low in soluble and insoluble fiber, inadequate exercise, bowel
disorders and poor abdominal pressure and muscular weakness.

Current Treatment. Some patients
suffering from chronic idiopathic constipation can be
successfully treated with lifestyle modification, dietary
changes and increased fluid and fiber intake, and these
treatments are generally tried first. For patients who fail to
respond to these approaches, physicians typically recommend
laxatives, most of which are available
over-the-counter.
The most commonly used laxatives can be categorized as
stimulants, stool softeners, bulk-forming agents, osmotics or
lubricants. Though somewhat effective in treating chronic
idiopathic constipation, stimulants and stool softeners can be
habit forming, while bulk-forming agents are often ineffective
in patients with
moderate-to-severe
constipation. Osmotics, such as
MiraLaxtm
(polyethylene glycol 3350) and lactulose are labeled for
use only for treating occasional constipation, not chronic
idiopathic constipation, and they may cause fluid and
electrolyte imbalance, which, if left untreated, can impair
normal function of the nerves and muscles. MiraLax was recently
approved for sale as an over-the-counter treatment. In addition,
lubricants, such as orally administered mineral oil, can be
inconvenient and unpleasant for patients to ingest.

For those patients who fail to respond to laxatives,
Zelnorm®
(tegaserod maleate), a partial serotonin-receptor agonist, was
often prescribed. In March 2007, at the request of the FDA,
Zelnorm was withdrawn from the U.S. market by Novartis. The
FDA requested that Novartis discontinue marketing Zelnorm based
on a recently identified finding of an increased risk of serious
cardiovascular adverse events associated with use of the drug.
The FDA indicated that it might allow Zelnorm to be prescribed
under a special program to some patients for whom no other
treatment options are available and in whom the benefits of
Zelnorm treatment outweigh the chance of serious side effects.
The FDA also indicated a willingness to consider limited
re-introduction of Zelnorm in the United States if a population
of patients can be identified in whom the benefits of the drug
outweigh the risks, following discussion at a public advisory
committee meeting. Even before its withdrawal, however, Zelnorm
was not approved for administration to patients over
65 years of age and has been linked with incidents of
ischemic colitis, a life-threatening inflammation of the large
intestine caused by

restricted blood flow, and other forms of intestinal ischemia.
In addition, the effectiveness of Zelnorm for the treatment of
chronic idiopathic constipation has not been studied beyond
12 weeks.

Market Opportunity. Studies published
in The American Journal of Gastroenterology estimate that
approximately 42 million people in the United States suffer
from constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.

We believe that AMITIZA has a number of advantages over existing
treatment options that could help it capture a significant
portion of, and potentially expand, the existing market for
chronic idiopathic constipation therapies. These advantages
include the following:



AMITIZA has been approved for administration to adults of all
ages, including those over 65 years of age;



AMITIZA has been approved without limitation on duration of
use; and



AMITIZA has not been associated with the serious side effects
observed with some other treatment options, such as ischemic
colitis, electrolyte imbalance and cardiovascular ischemic
events.

Clinical Trial Results. In connection
with obtaining FDA marketing approval of AMITIZA, we conducted a
comprehensive program of clinical trials of this drug for use in
treating chronic idiopathic constipation. This clinical program
included two Phase III pivotal trials and three long-term
safety and efficacy trials.

Efficacy Results in Two Pivotal Clinical
Trials. In August 2002 and September 2003, we
completed two multi-center, double-blind, randomized,
placebo-controlled, four-week, Phase III clinical trials of
substantially identical design to assess the safety and efficacy
of AMITIZA for the treatment of chronic idiopathic constipation.
In each of these trials, we enrolled approximately 240
participants aged 18 or older with a history of chronic
idiopathic constipation. The primary efficacy endpoint in these
trials was the frequency of spontaneous bowel movements during
the first week of treatment. Secondary efficacy endpoints
included the frequency of spontaneous bowel movements during the
second, third and fourth weeks of treatment, the percentage of
participants with a spontaneous bowel movement within
24 hours after administration, the time to first
spontaneous bowel movement and weekly subjective assessments by
participants of average stool consistency, degree of straining,
severity of constipation, overall treatment effectiveness and
prevalence of other related symptoms, such as bloating and
discomfort.

In these trials, AMITIZA met its primary efficacy endpoint with
statistical significance, increasing the frequency of
spontaneous bowel movements from baseline during the first week
of treatment by 75% in one pivotal trial and 78% in the second
pivotal trial, in each case with a p-value less than 0.0001. In
addition, on the basis of combined data from both pivotal
trials, AMITIZA met all but one of the secondary efficacy
endpoints with statistical significance for all treatment weeks.
That one secondary efficacy endpoint, abdominal discomfort,
showed statistically significant improvements only during the
last two weeks of treatment with AMITIZA compared to placebo.
The results of these trials were consistent in subpopulation
analyses for gender, race and patients 65 years of age or
older. We determined statistical significance based on a widely
used, conventional statistical method that establishes the
p-value of clinical results. Under this method, a p-value of
0.05 or less represents statistical significance, meaning that
there is a less than
one-in-twenty
likelihood that the observed results occurred by chance.

The table below sets forth the mean number of spontaneous bowel
movements for the
intent-to-treat
population in these two pivotal trials on a weekly basis for
each of the four weeks of the trials. The
intent-to-treat
population for these trials consisted of all participants
enrolled in the trials who were randomized and received at least
one dose of AMITIZA or placebo with the last observation carried
forward.

In the table above, n indicates the number of
participants in each treatment group.

Efficacy Results in Long-term Safety
Trials. Between November 2001 and January 2005,
we conducted three multi-center, open-label, long-term clinical
safety and efficacy trials of AMITIZA in patients with a history
of chronic idiopathic constipation. The trials consisted of one
six-month trial and two twelve-month trials and enrolled a total
of 881 patients age 18 or older. The primary objective
of these trials was to demonstrate the safety of AMITIZA when
administered to participants in twice-daily doses of 24
micrograms each. A secondary objective was to provide further
evidence of the long-term efficacy of AMITIZA in treating the
symptoms of chronic idiopathic constipation. In these trials,
AMITIZA produced statistically significant improvements from
baseline in subjective assessments of constipation severity,
abdominal bloating and abdominal discomfort over both the
six-month and the twelve-month treatment periods with a p-value
less than or equal to 0.0001. Subjective assessment of
constipation severity was improved by an average of 1.47 points
on a five-point scale in the six-month trial and 1.38 points in
the twelve-month trial; subjective assessment of abdominal
bloating was improved by an average of 0.98 points in the
six-month trial and 1.00 points in the twelve-month trial; and
subjective assessment of abdominal discomfort was improved by an
average of 0.91 points in the six-week trial and
0.87 points in the twelve-month trial.

Safety Profile and Withdrawal Effects. AMITIZA
was well tolerated in twice-daily doses of 24 micrograms
each in an earlier Phase II trial, the two Phase III
pivotal trials and the three long-term clinical safety and
efficacy trials. These trials revealed no apparent increased
risk of serious adverse events as a result of treatment with
AMITIZA. The most common adverse events reported by participants
in these six trials were nausea, which was reported by 31% of
all trial participants, and diarrhea and headache, which were
each reported by 13% of all trial participants. The incidence of
nausea was lower among participants 65 years of age or
older, with only 18.6% of those participants reporting this side
effect. In addition, because AMITIZA demonstrated a potential to
cause fetal loss in guinea pigs in preclinical studies, its
label provides that it should be used during pregnancy only if
the potential benefit justifies the potential risk to the fetus.
The label further states that women who could become pregnant
should have a negative pregnancy test prior to beginning therapy
with the drug and should be capable of complying with effective
contraceptive measures.

Post-marketing Studies. In connection with our
marketing approval for AMITIZA for the treatment of chronic
idiopathic constipation in adults, we committed to the FDA to
conduct post-marketing studies to evaluate the safety of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. We initiated the
studies in January 2007.

Irritable
Bowel Syndrome with Constipation

We have conducted two Phase III pivotal trials and a
long-term safety trial of AMITIZA in men and women for the
treatment of irritable bowel syndrome with constipation. In
these trials, participants took AMITIZA gelatin capsules orally
in twice daily doses of 8 micrograms each.

Disease Overview. Irritable bowel
syndrome is a disorder of the intestines with symptoms that
include severe cramping, pain, bloating and extreme changes of
bowel habits, such as diarrhea or constipation. Patients
diagnosed with irritable bowel syndrome are commonly classified
as having one of three forms: irritable bowel syndrome with
constipation, irritable bowel syndrome with diarrhea, or
mixed-pattern irritable bowel syndrome alternating between
constipation and diarrhea. Currently, irritable bowel syndrome
in all its forms is considered to be one of the most common
gastrointestinal disorders.

Current Treatment. Most treatment
options for irritable bowel syndrome with constipation focus on
separately addressing symptoms, such as pain or infrequent bowel
movements. Some patients suffering from irritable bowel syndrome
with constipation can be successfully treated with dietary
measures, such as increasing fiber and fluid intake, and these
treatments are generally tried first. If these measures prove
ineffective, laxatives are frequently used for the management of
this condition. Zelnorm is currently the only FDA-approved drug
indicated for the treatment of irritable bowel syndrome with
constipation, although its label limits its indication to
short-term treatment of women. In March 2007, however, at the
request of the FDA, Zelnorm was withdrawn from the U.S. market
by Novartis. The FDA requested that Novartis discontinue
marketing Zelnorm based on a recently identified finding of an
increased risk of serious cardiovascular adverse events
associated with use of the drug. The FDA indicated that it might
allow Zelnorm to be prescribed under a special program to some
patients for whom no other treatment options are available and
in whom the benefits of Zelnorm treatment outweigh the chance of
serious side effects. The FDA also indicated a willingness to
consider limited re-introduction of Zelnorm in the United States
if a population of patients can be identified in whom the
benefits of the drug outweigh the risks, following discussion at
a public advisory committee meeting. In December 2005, the
European Medicines Agency refused marketing approval for Zelnorm
for the treatment of irritable bowel syndrome with constipation
in women, citing the inconclusiveness of clinical studies in
demonstrating its effectiveness. In March 2006, the Agency
denied an appeal of that decision.

Market Opportunity. According to the
American College of Gastroenterology, irritable bowel syndrome
affects approximately 58 million people in the United
States, and irritable bowel syndrome with constipation accounts
for approximately one-third of these cases.

Development Status. In June 2004, we
completed a multi-center, double-blind, randomized,
placebo-controlled, dose-response,
12-week
Phase II clinical trial to assess the safety and efficacy
of AMITIZA for the treatment of irritable bowel syndrome with
constipation in daily doses of 16, 32 and 48 micrograms. In
this trial, we enrolled approximately 200 participants meeting
the International Congress of Gastroenterologys

working criteria for the diagnosis of irritable bowel syndrome
with constipation, referred to as the Rome II criteria. The
objective of this trial was to evaluate the safety and efficacy
of multiple dose levels of AMITIZA in this patient population in
order to select the appropriate dose for Phase III pivotal
studies.

The primary efficacy endpoint for this trial was a subjective
assessment of changes in abdominal discomfort and pain during
the first month of treatment. Secondary efficacy endpoints
included subjective assessments of changes in abdominal
discomfort and pain during the second and third months of
treatment, frequency of spontaneous bowel movements, subjective
assessments of average stool consistency, degree of straining,
abdominal bloating, severity of constipation and overall
treatment effectiveness and subjective assessment of quality of
life.

In this trial, AMITIZA demonstrated a statistically significant,
dose-dependent trend in improvement in mean change from baseline
abdominal discomfort and pain during the first month of
treatment with a p-value of 0.0431. The term mean change from
baseline refers to differences in patients condition after
treatment with the drug or the placebo compared to their
condition before treatment. This dose-dependent trend in
improvement in mean change from baseline also was statistically
significant during the second month of treatment with a
p-value of
0.0336. During the third month of treatment, the trend in favor
of AMITIZA continued, but was not statistically significant.

In accordance with the trials protocol, we conducted
comparisons of specific doses of AMITIZA versus placebo to
evaluate differences in patients assessments of abdominal
discomfort and pain before and after treatment. During
the first month of treatment, only the 48 microgram dose
demonstrated a statistically significant improvement over
placebo in mean change from baseline, showing an improvement of
0.46 points for AMITIZA compared to an improvement of 0.19
for the placebo, and with a p-value of 0.0226. During the second
month of treatment, improvements from baseline in all three
doses were statistically significant compared with placebo, with
improvements of 0.52 points at the 16 microgram dose
of AMITIZA, 0.53 points at the 32 microgram dose and
0.54 points at the 48 microgram dose, compared to a
0.23 point improvement for the placebo, with p-values of
0.0392 for the 16 microgram dose, 0.0331 for the
32 microgram dose and 0.0277 for the 48 microgram
dose. The mean change from baseline compared with placebo in the
32 microgram dose during the first month of treatment was
not statistically significant. Accordingly, as provided in the
trial protocol, we initially did not test the 16 microgram
dose compared to placebo for the first month of treatment.
However, we subsequently performed a comparison that
demonstrated a statistically significant improvement from
baseline abdominal discomfort and pain in the 16 microgram
dose during the first month of treatment compared with placebo,
with an improvement of 0.45 points for AMITIZA compared to
0.19 points for placebo, and with a p-value of 0.033.
Several secondary efficacy endpoints, including frequency of
spontaneous bowel movements, subjective assessments of average
stool consistency, degree of straining, abdominal bloating and
severity of constipation, also showed overall dose-dependent
trends that were statistically significant for at least two of
the three months of treatment.

Although AMITIZA was well tolerated at all doses in this trial,
the 16 microgram daily dose produced the best overall
balance of safety and efficacy, with participants in the 32 and
48 microgram treatment groups generally more likely to
discontinue treatment due to adverse events. Adverse events
appeared to be dose-dependent between the 16 and 48 microgram
AMITIZA treatment groups and occurred more frequently in the
AMITIZA treatment group than in the placebo treatment group.
Nausea was reported by 17% of participants dosed at 16
micrograms and 22% of participants dosed at 48 micrograms, and
diarrhea was reported by 12% of participants dosed at 16
micrograms and 27% of participants dosed at 48 micrograms.

Based on the results of this Phase II trial, we initiated
two pivotal Phase III clinical trials of AMITIZA in men and
women for irritable bowel syndrome with constipation in May
2005, each involving 570 or more participants meeting the
Rome II criteria for irritable bowel syndrome with
constipation at 65 investigative study sites in the United
States. We enrolled the last participant for these trials in
April 2006. These Phase III pivotal trials were designed as
double-blind, randomized,
12-week
clinical trials to demonstrate the efficacy and safety of
AMITIZA for the treatment of symptoms of irritable bowel
syndrome with constipation using twice daily doses of
8 micrograms each, or 16 micrograms total. The primary
efficacy endpoint for these trials was a subjective assessment
of the participants overall relief from the symptoms of
irritable bowel syndrome

with constipation. The secondary efficacy endpoints were similar
to those for our Phase II clinical trials of AMITIZA for
this indication and involved subjective assessments of such
factors as abdominal discomfort and pain, bloating, straining,
stool consistency, severity of constipation and quality of life
components. The first of the two pivotal studies was followed by
a randomized withdrawal period to assess the effects, if any,
associated with withdrawal of AMITIZA over a four-week period.
We also initiated an additional follow-on safety study to assess
the long-term use of AMITIZA as a treatment for this indication.

In the two pivotal phase III trials, participants receiving
AMITIZA at a dose of 8 micrograms twice daily were more likely
to achieve overall relief from symptoms compared to those
receiving the placebo, with 17.9% of the AMITIZA group achieving
overall relief compared to 10.1% for the placebo group, with a
p-value of 0.001. In both trials individually, participants
receiving AMITIZA experienced overall relief from symptoms at
higher rates than those receiving the placebo, 18.2% compared to
9.8% with a p-value of 0.009 in one trial and 17.7% compared to
10.4% with a p-value of 0.031 in the other.

In the combined phase III trials, the secondary endpoints,
which were measured on a
five-point
scale, were improved with statistical significance in
participants receiving AMITIZA compared to those receiving the
placebo. At the end of the three-month treatment period,
subjective assessments of abdominal discomfort and pain by
participants receiving AMITIZA improved from baseline by an
average of 0.45 points, compared to average improvements in
participants receiving the placebo of 0.35 points; subjective
assessments of stool consistency improved by an average of 0.51
points compared to 0.38 points; subjective assessments of
straining improved by an average of 0.60 points compared to 0.47
points; subjective assessments of constipation severity improved
by an average of 0.52 points compared to 0.40 points; and
subjective assessments of abdominal bloating improved by an
average of 0.45 points compared to 0.36 points. At the end of
the three-month treatment period, the overall composite score
for subjective assessments of quality of life improved from
baseline an average of 17.1 points on a 100-point scale for
participants receiving AMITIZA compared to an average
improvement of 14.4 points for those receiving the placebo.
Statistical significance was seen for each of these secondary
endpoints, with the subjective assessments of abdominal
discomfort and pain having a p-value of 0.013, stool consistency
having a p-value of 0.006, straining having a p-value of 0.020,
constipation severity having a p-value of 0.005, abdominal
bloating having a p-value of 0.024 and quality of life having a
p-value of 0.021.

AMITIZA was well-tolerated in the phase II and the
phase III trials. In those studies combined and at the
recommended dose, there was a similar incidence of serious
adverse events, 1% in both the AMITIZA group and the placebo
group, and treatment-related adverse events, with 26% in the
AMITIZA groups compared to 21% in the placebo groups. The most
common treatment-related adverse events were nausea, which was
reported by 8% of participants receiving AMITIZA and 4% of those
receiving the placebo, and diarrhea, which was reported by 7% of
the AMITIZA groups and 4% of the placebo groups. Abdominal pain
occurred at a similar rate in the placebo groups and the AMITIZA
groups, with 5% reporting this adverse event.

Based on these trial results, we submitted a supplement to our
existing new drug application, or NDA, for AMITIZA to the FDA in
June 2007 seeking marketing approval for AMITIZA for the
treatment of this indication.

Opioid-Induced
Bowel Dysfunction

We plan to commence Phase III pivotal clinical trials of
orally administered AMITIZA gelatin capsules for the treatment
of opioid-induced bowel dysfunction in the third quarter of 2007.

Disease Overview. Opioid-induced bowel
dysfunction comprises a variety of gastrointestinal side effects
stemming from the use of narcotic medications such as morphine
and codeine, which are referred to as opioids. Physicians
prescribe opioids for patients with advanced medical illnesses,
such as cancer and AIDS, patients undergoing surgery and
patients who experience chronic pain. Despite their
pain-relieving effectiveness, opioids are known to produce
gastrointestinal effects that lead to opioid-induced
constipation, including inhibition of large intestine motility,
decreased gastric emptying and hard stools.

Current Treatment. There are currently
no FDA-approved products that are specifically indicated for
treatment of opioid-induced bowel dysfunction. Current treatment
options for opioid-induced bowel dysfunction include the use of
stool softeners, enemas, suppositories and peristaltic
stimulants such as senna, which stimulate muscle contractions in
the bowel. The effectiveness of these products for the treatment
of opioid-induced bowel dysfunction is limited due to the
severity of the constipation caused by opioids. In addition,
physicians often cannot prescribe peristaltic stimulants for the
duration of narcotic treatment because of the potential for
dependence upon these stimulants. As a result, patients
frequently must discontinue opioid therapy and endure pain in
order to obtain relief from opioid-induced bowel dysfunction.

Market Opportunity. According to the
American Pain Foundation, over 50 million Americans suffer
from chronic pain, and nearly 25 million Americans
experience acute pain each year due to injuries or surgery.
Opioid pain relievers are widely prescribed for these patients,
many of whom also develop opioid-induced bowel dysfunction. We
believe over three million people in the United States currently
suffer from opioid-induced bowel dysfunction.

Opioid drugs are known to increase absorption of electrolytes,
including chloride, in the small intestine, contributing to the
constipating effects of these analgesics. We believe that
AMITIZA, as a chloride channel activator, may directly
counteract this side effect without interfering with the
analgesic benefits of opioids. As a result, we believe that
AMITIZA, if approved for the treatment of opioid-induced bowel
dysfunction, could hold a competitive advantage over drugs that
do not work through this mechanism of action.

Development Status. We have completed
preclinical studies of AMITIZA as a potential therapy for
opioid-induced bowel dysfunction in a model of morphine-induced
constipation in mice. In these studies, AMITIZA was shown to
improve intestinal transit time and did not result in any
reduction of the analgesic effect of morphine. Based on these
preclinical results, we have determined to pursue development of
AMITIZA as a treatment for opioid-induced bowel dysfunction.

SPI-8811
(cobiprostone)

Overview

We are developing the prostone compound
SPI-8811 for
oral administration to treat various gastrointestinal and liver
disorders, including NSAID-induced ulcers, non-alcoholic fatty
liver disease, portal hypertension and gastrointestinal
disorders associated with cystic fibrosis. We also plan to
develop an inhaled formulation of
SPI-8811 for
the treatment of respiratory symptoms of cystic fibrosis and
chronic obstructive pulmonary disease. We believe that
SPI-8811,
like AMITIZA, is an activator of the chloride ion channel
ClC-2, which
is known to be present in gastrointestinal, liver and lung cells.

We completed two Phase I clinical trials of
SPI-8811 in
healthy volunteers in Japan in 1997. In these trials, orally
administered
SPI-8811 was
generally well tolerated both when it was administered three
times daily for a period of seven days at doses we expect to be
clinically relevant and when it was administered in single doses
that were significantly higher than those we expect to be
clinically relevant. Several incidents of loose or watery stools
were reported, but at doses higher than those we expect to use
in planned additional clinical trials. No serious adverse events
were experienced by any participants in these trials, and no
participants withdrew from these trials due to adverse events,
even at dose levels several times higher than what we expect to
be clinically-relevant doses of
SPI-8811.

Non-Steroidal
Anti-Inflammatory Drug-Induced Ulcers

We plan to commence a Phase II clinical trial of SPI-8811
for the prevention and treatment of NSAID-induced ulcers in the
third quarter of 2007.

Disease Overview. NSAIDs, such as
aspirin and ibuprofen, are among the most commonly prescribed
drugs worldwide. They are used to treat common medical
conditions, such as arthritis, headaches and fever. In addition,
with the recent withdrawal from the marketplace of the COX-2
inhibitors
Vioxx®
(rofecoxib) and
Bextra®
(valdecoxib), which were widely prescribed for arthritis
patients, an increased number of these patients

are returning to NSAID therapy. However, gastrointestinal
symptoms, such as gastric, or stomach, ulcers and bleeding, are
major limiting side effects of long-term NSAID use.

Current Treatment. Current treatment
options for NSAID-induced ulcers include products designed to
prevent the formation of gastric ulcers during NSAID use and
products that help to repair the damage of ulcers after they
have developed.
Cytotec®
(misoprostol) is currently the only FDA approved product for the
prevention of NSAID-induced gastric ulcers. It is sometimes
marketed as a combination product with NSAIDs under the brand
name
Arthrotec®.
However, Cytotec has been associated with severe diarrhea,
particularly in higher doses, and its label restricts its use in
women of childbearing potential, except in very limited
circumstances, because it can cause abortion, premature birth
and birth defects.

After NSAID-induced ulcers have developed, proton pump
inhibitors, such as
Nexium®
(esomeprazole magnesium) and
Prevacid®
(lansoprazole), are prescribed to treat most gastric ulcer
patients, either alone or in combination with other treatments.
H2 blockers, such as
Pepcid®
(famotidine),
Tagamet®
(cimetidine) and
Zantac®
(ranitidine hydrochloride), help to reduce stomach acid and are
typically prescribed as a second line of therapy for gastric
ulcers, when proton pump inhibitors are not effective, or are
used in conjunction with proton pump inhibitors. Although both
proton pump inhibitors and H2 blockers can aid in the repair of
existing gastric ulcers, neither of these drug categories has
been shown to be effective in preventing ulcer development.
Furthermore the therapeutic effects of these products are only
observed at high doses and in some types of at-risk patients,
such as those with a prior history of ulcers or those
65 years of age or older.

Market Opportunity. According to a
study published in Postgraduate Medicine, approximately
13 million patients in the United States are regular users
of NSAIDs. According to the American Chronic Pain Association,
as many as 20% of patients who take NSAIDs daily may develop
gastric ulcers. We believe that many patients treated with
NSAIDs are not prescribed preventative treatment for gastric
ulcers due to a combination of high cost, side effects and lack
of a well established standard of care. We believe that these
factors also limit the use of prescription products for the
repair of gastric ulcers after they have developed. Based on
SPI-8811s novel mechanism of action and protective
activity in animal models, we believe that it may be effective
at both preventing and treating NSAID-induced ulcers, but
without the safety concerns and restrictions on use associated
with existing treatment options.

Development Status. We have completed
preclinical studies of
SPI-8811 as
a potential therapy for NSAID-induced ulcers. In preclinical
tests in rats,
SPI-8811
protected against formation of ulcers induced by indomethacin,
an NSAID, and ulcers induced by stress and demonstrated an
acceptable safety profile at what we believe are clinically
relevant doses. In the third quarter of 2007, we plan to
commence a Phase II clinical trial for
SPI-8811. We
expect that this Phase II trial will be a multi-center,
randomized, placebo-controlled study to evaluate the effects of
multiple doses of
SPI-8811 for
the treatment and prevention of ulcer formation following
treatment with NSAIDs. We believe that
SPI-8811 may
have utility in preventing other gastric injury in addition to
NSAID-induced
ulcers. Accordingly, as we progress through our clinical program
for
SPI-8811, we
may seek to broaden our indication for this compound by
exploring other gastrointestinal lesions, including hemorrhages,
erosions and ulcerations.

Other
Potential Indications

Portal Hypertension. Portal
hypertension is the
build-up of
pressure in the portal vein connecting the intestines and the
liver and is caused by a narrowing of the blood vessel as a
result of liver cirrhosis. Increased pressure in the portal vein
can lead to the development of large, swollen veins in the
esophagus, stomach and rectum which, if ruptured, can result in
potentially life-threatening blood loss. According to a
physician survey conducted by MEDACorp, an independent strategic
consulting firm focused on the health care sector and a division
of Leerink Swann & Co., Inc., one of the managing
underwriters for this offering, approximately 4.0 million
Americans suffer from liver cirrhosis, with approximately
1.5 million of those individuals also diagnosed with portal
hypertension. Beta-adrenergic receptor blocking agents, or beta
blockers, such as propranolol are the most common treatment for
portal hypertension. Beta blockers help to relieve the effects
of portal hypertension by lowering blood pressure throughout the
body. However, these products are associated with increased risk
of stroke and a number of other side effects, including, nausea,
diarrhea, hypotension, heart

failure, dizziness, fatigue, insomnia and depression, which may
limit their use, particularly among elderly patients. In
contrast to beta blockers, we believe that SPI-8811 may be
effective at reducing portal hypertension without exhibiting
many of the serious side effects associated with beta blockers.

increased cutaneous blood flow in two additional animal models
in the presence of chemical agents known to constrict the
peripheral vasculature; and



reduced vascular resistance in the liver induced by a chemical
agent in an isolated rat model.

We plan to commence a Phase II
proof-of-concept
study of
SPI-8811 in
patients with portal hypertension in 2007.

Non-Alcoholic Fatty Liver
Disease. Non-alcoholic fatty liver disease is
characterized by elevations of specific liver enzymes in the
absence of excessive alcohol intake or other chronic liver
diseases. Although all levels of non-alcoholic fatty liver
disease lead to fat accumulation in the liver, the more advanced
versions of this disease, known as Type 3 and Type 4
non-alcoholic fatty liver disease, also involve fibrosis and
greatly increase the risk of progressive liver disease,
cirrhosis and liver-related death. There is currently no
treatment available for non-alcoholic fatty liver disease and
the market size is unknown. According to the National Institute
of Diabetes and Digestive and Kidney Diseases, a division of the
National Institutes of Health, approximately 10% to 20% of
Americans are affected by fat in the liver, and this condition
is becoming more common, possibly due to the greater number of
Americans with obesity.

In preclinical studies of
SPI-8811 as
a potential treatment for non-alcoholic fatty liver disease in
rodent models of liver damage,
SPI-8811 was
found to favorably alter various serum indicators of liver
function and to reduce the severity of liver injury caused by
hepatitis.

In June 2003, we completed a limited,
28-day
Phase II trial to assess the safety and efficacy of orally
administered
SPI-8811 for
the treatment of non-alcoholic fatty liver disease. The efficacy
results of this trial were inconclusive, which we believe was
likely the result of the trials short treatment period and
the fact that all but one of the participants in this trial
suffered from Type 4 non-alcoholic fatty liver disease, the most
severe form of the disease. Although we believe that further
investigation of the role of
SPI-8811 in
the prevention or delay of non-alcoholic fatty liver disease
progression is warranted, current techniques for studying this
condition require a biopsy of the liver. As a result, we do not
plan to pursue human clinical trials of
SPI-8811 for
the treatment of non-alcoholic fatty liver disease until such
time as less invasive methods or alternative diagnostic
endpoints are developed for diagnosing the disease and
evaluating its progress.

Cystic Fibrosis. Cystic fibrosis is a
congenital disease that usually develops during childhood and
causes pancreatic insufficiency and pulmonary disorder. The gene
product responsible for cystic fibrosis is a protein called the
cystic fibrosis transmembrane conductance regulator, or CFTR.
CFTR is found in cells lining the internal surfaces of the
lungs, salivary glands, pancreas, sweat glands, intestine and
reproductive organs and acts as a channel transporting chloride
ions out of the cell. Cystic fibrosis is caused by a defect in
the CFTR protein, which prevents the transport of chloride ions
between cells, causing the body to develop thick, sticky mucus
in the lungs, pancreas and liver. According to the Cystic
Fibrosis Foundation, cystic fibrosis currently affects
approximately 30,000 people in the United States and is usually
diagnosed in infants and children.

In preclinical in vitro tests on human cell lines,
SPI-8811
acted as an ion transport modulator, facilitating transport of
chloride ions across cell membranes through the
ClC-2
chloride channel, a transport process different from that which
is defective in cystic fibrosis patients. We believe that the
ability of
SPI-8811 to
activate chloride transport using an alternate chloride channel
could potentially reverse the effects caused by the defective
CFTR, reducing mucus viscosity and allowing increased clearance
of mucus in the lungs, pancreas and liver.

In 2003, we conducted an open-label, dose-escalating
Phase II trial of orally administered
SPI-8811 in
24 participants with documented cystic fibrosis. These
participants were assigned to one of three dose cohorts at four
sites in the United States and treated with
SPI-8811 for
seven days.
SPI-8811 was
generally well tolerated by trial participants, although one
participant experienced a serious adverse event and was
hospitalized for

exacerbation, or short-term worsening, of the disease, possibly
as a result of treatment with
SPI-8811.
Although this trial focused primarily on safety, we also
examined the effect of SPI-8811 on chloride secretion in cells
lining the nose and salivary glands as well as overall quality
of life as measured by a questionnaire published by the Cystic
Fibrosis Foundation. The results for chloride secretion were
inconclusive, which we believe was likely due to the rapid
metabolization of the drug in the gastrointestinal tract, the
short duration of the trial and the limited number of
participants enrolled in the trial. However, we did observe
improvements in baseline gastrointestinal disorders associated
with cystic fibrosis as measured by the questionnaire. As a
result, we determined to focus our initial development efforts
on the treatment of gastrointestinal disorders associated with
cystic fibrosis and plan to commence a Phase II dose-ranging
trial of orally administered SPI-8811 for the treatment of these
disorders by the second quarter of 2008. In the future, we also
plan to develop an inhaled formulation of
SPI-8811 for
the treatment of respiratory symptoms of cystic fibrosis.

Chronic Obstructive Pulmonary
Disease. Chronic obstructive pulmonary
disease is characterized by the progressive development of
airflow limitation in the lungs that is not fully reversible and
encompasses chronic bronchitis and emphysema. According to the
National Heart, Lung and Blood Institute, or the NHLBI, a
division of the National Institutes of Health, approximately
12 million adults 25 years of age or older in the
United States are diagnosed with chronic obstructive pulmonary
disease. The NHLBI further estimates that approximately
24 million adults in the United States have evidence of
impaired lung function, indicating in their view that this
disease is underdiagnosed. Anticholinergics, smooth muscle
relaxers that can help to widen air passageways to the lungs,
have been the primary therapy to treat chronic obstructive
pulmonary disease. Recently, combination agents, such as
steroid/Beta-2
agonists, have enjoyed increased use as chronic obstructive
pulmonary disease treatments. However, these treatments relieve
only the symptoms of chronic obstructive pulmonary disease, such
as chronic cough or shortness of breath, and have limited effect
on reducing the incidence of exacerbation of the disease.

Because we believe that the method of action of
SPI-8811
involves a barrier protection function resulting from chloride
channel activation, we believe that it may be able to address
multiple respiratory treatment needs, including treatment of
exacerbations, chronic excessive mucus secretion and the mucus
component of chronic bronchitis. In pharmacological testing
using an inhaled formulation of
SPI-8811 in
a guinea pig model to assess changes in respiratory and
pulmonary function,
SPI-8811
reduced cigarette smoke-induced airway resistance and restored
forced expiratory volume. We plan to conduct additional
preclinical testing of this inhaled formulation of
SPI-8811 as
a potential treatment for chronic obstructive pulmonary disease.

SPI-017

Overview

We are conducting preclinical development of SPI-017 for the
treatment of peripheral arterial and vascular disease and
central nervous system disorders. Initially, we are working on
the development of an intravenous formulation of
SPI-017 for
the treatment of peripheral arterial disease and stroke. We also
are developing an oral formulation of
SPI-017 for
the treatment of Alzheimers disease. We plan to commence
Phase I clinical trials of the intravenous formulation of
SPI-017 and
Phase I clinical trials of the oral formulation in 2008.
Results from the Phase I trials of both the intravenous and
the oral formulations may be useful in the development of any of
these indications.

In preclinical in vitro tests on human cell lines,
SPI-017
activated chloride channels in very low concentrations on a
variety of cells found in the central nervous system and
peripheral blood vessels. We are currently evaluating the safety
profile of
SPI-017 in
preclinical toxicology studies.

Potential
Indications

Peripheral Arterial and Vascular
Disease. Peripheral arterial disease, which
also is sometimes referred to as peripheral vascular disease, is
a chronic condition that results from narrowing of the vessels
that supply blood to the stomach, kidneys, arms, legs and feet.
Peripheral arterial disease is caused by the
build-up of
fatty deposits, or plaque, in the inner walls of the arteries as
a result of a vascular condition known as atherosclerosis. This
build-up of
plaque restricts the flow of blood throughout the body,
particularly in the

arms and legs, and can lead to painful cramping and fatigue
after exercise. The American Heart Association estimates that
peripheral arterial disease affects as many as 8 million to
12 million people in the United States.

Anti-platelet medications, vasodilators and prostaglandins
represent the most frequently prescribed treatments for
peripheral arterial disease, but they have little or no impact
on symptoms or the underlying atherosclerotic process.
Palux®
(alprostadil) and
Liple®
(alprostadil) are used for the treatment of chronic arterial
occlusion in Japan, but are not currently available in the
United States. In addition, Palux and other prostaglandin E1
drug products should not be administered to patients with
bleeding disorders or patients being treated with chronic
anti-platelet medications, such as aspirin, due to the
detrimental effect of these products on platelet aggregation.
Despite the need for additional treatments, we believe that few
novel therapies are being explored.

In preclinical animal studies, intravenously administered
SPI-017 counteracted blood vessel constriction induced by a
chemical agent without significantly affecting blood pressure.
In addition, in preclinical animal studies,
SPI-017 had
no effect on platelet aggregation. We believe that this may
suggest that
SPI-017,
unlike Palux and other prostaglandin E1 drugs, could be
used to treat patients with bleeding disorders or patients being
treated with chronic anti-platelet medications. We are planning
additional experiments to further test the activity of
SPI-017 in
animal models of peripheral arterial disease.

Stroke. Ischemic stroke occurs when an
artery that supplies blood to the brain becomes blocked due to a
blood clot or other blockage or when blood flow is otherwise
reduced as a result of a heart condition. During ischemic
stroke, a high rate of damage of neuronal cells in the brain
usually leads to permanent functional loss. The American Heart
Association estimates that approximately 700,000 patients
in the Unites States suffer strokes annually, 88% of which are
ischemic strokes.

The thrombolytic
Activase®
(alteplase, recombinant) is the principal drug currently used to
treat acute ischemic stroke in the United States. To be
effective, treatment with Activase must be initiated within
three hours after the onset of stroke symptoms. In addition,
because Activase is contraindicated in patients with
intracranial hemorrhaging or active internal bleeding, treatment
should be initiated only after exclusion of these conditions.

In animal studies, intravenously administered
SPI-017
reduced the extent of cerebral tissue damage in experimentally
induced ischemic stroke in rats. In these studies, intravenous
SPI-017
administered shortly after the restoration of blood flow also
significantly reduced the extent of tissue damage. We are
planning additional animal tests to further define the time
window for administration of
SPI-017 and
the concentration range.

Alzheimers
Disease. Alzheimers disease is a
chronic debilitating disease, with patients suffering from a
progressive dementia over a number of years, ultimately
resulting in severe incapacitation and a shortened lifespan.
According to the Alzheimers Association, there are
approximately 4.5 million Alzheimers disease patients
in the United States.

While the causes of Alzheimers disease are currently not
well understood, it is widely recognized that particular regions
of the brain may play a central role in memory. The brain
comprises a complex network of neurons that enable memory,
sensation, emotion and other cognitive functions. Neurons are
highly specialized cells that are capable of communicating with
each other through biochemical transmission across junctions
called synapses. For this communication to occur, neurons
secrete chemicals, known as neurotransmitters, that bind to
receptors on neighboring neurons. Coordinated communication
across synapses is essential for the formation of memories.

Several classes of ion channels play a critical role in both the
activation of neurons and in the secretion of neurotransmitters
across synapses. In particular, some classes of potassium ion
channels, sodium ion channels and calcium ion channels have been
shown to be critical in the cascade of events that leads to the
secretion of neurotransmitters in key regions of the brain
associated with memory. We believe that some of these channels
may be important in the process of memory formation and
retention.

Preliminary data from a preclinical study of SPI-017 in a rat
model of Alzheimers disease suggests that orally
administered SPI-017 may restore cognitive behavior. We are
planning additional studies to further define the activity of
SPI-017 in this animal model.

Marketing
and Sales

We are co-promoting AMITIZA in the United States with Takeda. We
plan to market other product candidates that we may bring to
market through a combination of our own sales capabilities and
co-marketing, co-promotion, licensing and distribution
arrangements with third-party collaborators.

As we develop other products for commercialization, we intend to
evaluate the merits of retaining commercialization rights for
ourselves, entering into similar collaborative arrangements with
leading pharmaceutical companies to help further develop and
commercialize our product candidates or a combination of both.
Our decision whether to enter into collaborative arrangements
will be based on such factors as anticipated development costs,
therapeutic expertise and the commercial infrastructure required
to access a particular market. We expect that in many of these
arrangements, we will seek to co-promote our products in the
United States and, in some cases, other markets as part of our
ongoing effort to build our internal sales and marketing
capabilities.

As part of this strategy, we entered into a
16-year
collaboration and license agreement with Takeda in October 2004
for the joint development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada. In
early 2006, we exercised the co-promotion rights under our
collaboration and license agreement with Takeda in order to
begin developing a specialized sales force to market AMITIZA and
other gastrointestinal-related products to complement
Takedas sales efforts. Our initial strategy is to focus
our marketing and sales efforts on promoting AMITIZA in the
institutional marketplace, including specialist physicians based
in academic medical centers and long-term care facilities. This
institutional market is characterized by a concentration of
elderly patients, who we believe will be a key market for
AMITIZA to treat gastrointestinal indications, and by physicians
who are key opinion leaders in the gastrointestinal field.
Takeda is marketing AMITIZA more broadly to office-based
specialty physicians and primary care physicians. Pursuant to
the terms of the collaboration and license agreement, Takeda is
required to provide a dedicated sales force of at least 200
people to promote AMITIZA and a supplemental sales force of at
least 500 people to promote AMITIZA together with one other drug
product. Takeda is currently utilizing TAP Pharmaceutical
Products, Inc., or TAP, a joint venture between an affiliate of
Takeda and Abbot Laboratories, to provide this supplemental
sales force. Takeda has advised us that the supplemental sales
force being supplied by TAP consists of over 700 people and is
marketing AMITIZA together with
Prevacid®
(lansoprazole), a product for the treatment of gastroesophageal
reflux disease, ulcers and a variety of other gastrointestinal
indications.

In late 2005 and early 2006, in anticipation of the launch of
AMITIZA, we recruited an experienced sales and marketing
management team comprising an executive vice president of
commercial operations, a vice president of marketing, a director
of medical marketing, a national sales director and four
regional sales managers.

In addition, effective February 2006, we entered into a contract
sales agreement with Ventiv Commercial Services, LLC, or Ventiv,
under which Ventiv provided us with a contract specialty sales
force of 38 field sales representatives to market AMITIZA
in our targeted institutional market. Our agreement with Takeda
provides that Takeda will fund a significant portion of our
contract sales force costs. We initially determined to engage a
contract sales force through Ventiv, instead of recruiting a
sales force of our own, to minimize the time necessary to launch
an operational sales force following our receipt of marketing
approval for AMITIZA from the FDA. In light of the size of the
sales force, we also believed this approach was more cost
effective in the short term than establishing our own sales
force internally. In addition, under the terms of our agreement
with Ventiv, we preserved the right to hire some or all of
Ventivs contract sales representatives as our own
employees after the first anniversary of their deployment in the
field, subject to payment of a specified conversion fee to
Ventiv.

We exercised our right to terminate our agreement with Ventiv
and to hire a significant portion of their sales staff as
employees of our company effective July 1, 2007. We believe
this will improve our ability to

recruit highly qualified sales staff and will enhance our
ability to control our sales force and its deployment. Although
these sales representatives have become employees of our
company, we intend to continue to outsource most of the
operational infrastructure associated with this sales force
through a new contract with Ventiv and, in some cases, through
other vendors. In connection with this internalization of our
specialty sales force, we expect to incur approximately $250,000
of transition expenses, primarily recruiting and training
expenses and a termination fee we paid to Ventiv, which will
affect our sales and marketing expenses for the quarter ending
September 30, 2007. We also anticipate that our ongoing
expenses relating to this sales force will increase by
approximately $400,000 annually over what those expenses would
have been if we had maintained the Ventiv relationship, due to
compensation increases we expect to implement.

We believe that the institutional focus of our specialty sales
force, which targets academic medical centers and long-term care
facilities, would facilitate our ability to sell other products
for the treatment of a variety of indications in several
therapeutic fields that are concentrated in the institutional
setting, as well as additional products in our own pipeline that
might be approved. In particular, we expect that our specialty
sales force will develop expertise over time that could be
useful in marketing additional products for the treatment of
gastrointestinal indications and for the treatment of the
elderly. We intend to pursue strategic acquisitions,
in-licensing or co-promotion opportunities to supplement our
existing product pipeline, especially those that would add
products complementary to the focus of our specialty sales force.

Takeda
Collaboration

In October 2004, we entered into a
16-year
collaboration and license agreement with Takeda to jointly
develop and commercialize AMITIZA for gastrointestinal
indications in the United States and Canada. The agreement
provides Takeda with exclusive rights within these two countries
to develop and commercialize AMITIZA for these indications under
all relevant patents, know-how and trademarks. Takeda does not
have the right to manufacture AMITIZA. Instead, Takeda is
required to purchase all supplies of the product from R-Tech
under a related supply and purchase agreement.

Development Costs. The agreement provides for
development cost-sharing arrangements in which Takeda funds all
development costs for the development of AMITIZA as a treatment
for chronic idiopathic constipation and irritable bowel syndrome
with constipation up to $30.0 million, of which we received
the full amount in 2005. We are required to fund the next
$20.0 million in development costs for these two
indications, and all development costs in excess of
$50.0 million are shared equally between Takeda and us. In
addition, Takeda and we share equally in all external costs of
regulatory-required studies up to $20.0 million, with
Takeda funding any remaining costs related to such studies. For
any additional indications beyond chronic idiopathic
constipation and irritable bowel syndrome with constipation and
for new formulations of AMITIZA, Takeda has agreed to fund all
development costs, including regulatory-required studies, to a
maximum of $50.0 million for each new indication and
$20.0 million for each new formulation. Takeda and we have
agreed to share equally all costs in excess of these amounts.
With respect to any studies required to modify or expand the
label for AMITIZA for the treatment of chronic idiopathic
constipation or irritable bowel syndrome with constipation,
Takeda has agreed to fund 70% of the costs of such studies and
we have agreed to fund the remainder. With respect to the
development costs for AMITIZA for the treatment of chronic
idiopathic constipation in pediatric patients, the joint
commercialization committee described below has determined that
such costs will be funded entirely by Takeda.

Commercialization Funding Commitment. Takeda
is obliged to maintain a specific level of funding for
activities in relation to the commercialization of AMITIZA. This
funding obligation is $10.0 million per year so long as
marketing approval for the product in the United States is
limited to the treatment of chronic idiopathic constipation. If
we receive marketing approval in the United States for the
treatment of irritable bowel syndrome with constipation and we
and Takeda jointly determine to conduct a full-scale
direct-to-consumer
television advertising campaign for AMITIZA, Takedas
funding obligation for commercialization activities will
increase to $80.0 million per year for three years.

Promotion and Marketing. Takeda is required to
provide a dedicated sales force of at least 200 people to
promote AMITIZA and a supplemental sales force of 500 people to
promote AMITIZA together with one

other drug product. In addition, Takeda is required to perform
specified minimum numbers of product detail meetings with health
care professionals throughout the term of the agreement
depending upon the indications for which AMITIZA has been
approved.

Co-Promotion Rights. Under the agreement, we
retained co-promotion rights, which we exercised in February
2006. In connection with our exercise of these rights, we agreed
to establish our own specialty sales force consisting of a team
of approximately 38 field sales representatives. The agreement
provides that Takeda will fund a portion of our sales force
costs, for a period of five years from the date we first deploy
our sales representatives. We may increase the total number of
our sales representatives and receive additional funding from
Takeda for any related costs up to a specified annual amount,
subject to the unanimous approval of the joint commercialization
committee described below.

Medical and Scientific Activities. We also are
entitled to receive cost reimbursement from Takeda on a
case-by-case
negotiated basis for a part of our commercialization efforts
after launch with respect to specific medical and scientific
activities undertaken by us. Takeda is to retain overall
responsibility for managing these medical and scientific
activities. We are responsible for the development of all
publications directed at a scientific audience until
January 31, 2007, with this work being reimbursed by Takeda
up to a specified limit. We retain all intellectual property
rights over the material in these publications. After
January 31, 2007, Takeda will be primarily responsible for
the development of these publications.

Licensing Fees, Milestone Payments and
Royalties. Takeda made an up-front payment of
$20.0 million in 2004 and has paid total development
milestone payments of $50.0 million through the quarter
ended March 31, 2007. Takeda is required to make an
additional $30.0 million milestone payment to us as a
result of our submission to the FDA in June 2007 of a supplement
to our existing NDA for AMITIZA seeking marketing approval for
AMITIZA for the treatment of irritable bowel syndrome with
constipation. Subject to reaching future development and
commercial milestones, we are entitled to receive up to
$110.0 million in additional development and commercial
milestone payments. In addition, upon commercialization of any
product covered by the agreement, Takeda is required to pay us a
quarterly royalty on net sales revenue on sales of the
commercialized product.

Governance. Our collaboration with Takeda is
governed by several committees consisting of an equal number of
representatives from both companies. These consist of a joint
steering committee, which resolves any conflicts arising within
the other committees, a joint development committee, a joint
commercialization committee and a joint manufacturing committee.
In the case of a deadlock within the joint steering committee,
our chief executive officer has the determining vote on matters
arising from the joint development and manufacturing committees,
while Takedas representative has the determining vote on
matters arising from the joint commercialization committee.

New Indications and Additional
Territories. Under the agreement, Takeda has a
right of first refusal to obtain a license to develop and
commercialize AMITIZA in the United States and Canada for any
new indications that we may develop. In addition, the agreement
granted Takeda an option to exclusively negotiate with our
affiliated European and Asian operating companies, Sucampo
Europe and Sucampo Japan, to jointly develop and commercialize
AMITIZA in two additional territories: Europe, the Middle East,
and Africa; and Asia. With respect to the negotiation rights for
Europe, the Middle East and Africa, Takeda was required to pay
Sucampo Europe an option fee of $3.0 million. In the event
that these negotiations failed to produce a definitive agreement
before we received marketing approval in the United States for
AMITIZA for the treatment of chronic idiopathic constipation in
adults, Sucampo Europe was required to repay Takeda
$1.5 million of the original option fee. With respect to
the negotiation rights for Asia, Takeda was required to pay
Sucampo Japan an option fee of $2.0 million. In the event
that these negotiations failed to produce a definitive agreement
within twelve months, Sucampo Japan was required to repay Takeda
$1.0 million of the original option fee. By the first
quarter of 2006, the option rights for both territories had
expired without agreement and, accordingly, we repaid Takeda an
aggregate of $2.5 million of the original option fees.

Term. The Takeda agreement continues until
2020 unless earlier terminated. We may terminate the agreement
if Takeda fails to achieve specific levels of net sales revenue,
or if Takeda comes under the control

of another party and launches a product competitive with
AMITIZA. Alternatively, either party has the right to terminate
the agreement in the following circumstances:



a breach of the agreement by the other party that is not cured
within 90 days, or 30 days in the case of a breach of
payment obligations;



a change of control of the other party in which the new
controlling party does not expressly affirm its continuing
obligations under the agreement;



insolvency of the other party; or



a failure to receive marketing approval from the FDA for AMITIZA
for the treatment of irritable bowel syndrome with constipation
and subsequent failure of the parties to agree on an alternative
development and commercialization strategy.

Intellectual
Property

Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.

We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG will in turn license back to us on an exclusive
basis. If we have not committed specified development efforts to
any prostone compound other than AMITIZA,
SPI-8811 and
SPI-017 by
the end of a specified period, which ends on the later of
June 30, 2011 or the date upon which Drs. Kuno and
Ueno no longer control our company, then the commercial rights
to that compound will revert to Sucampo AG, subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
Sucampo AG, wholly owned by Drs. Ryuji Ueno and Sachiko
Kuno and based in Zug, Switzerland, is the patent holding
company that maintains the patent portfolio derived from
Dr. Uenos research with prostone technology.

As of June 30, 2007, we had licensed from Sucampo AG rights
to a total of 51 U.S. patents,
19 U.S. patent applications, 27 European patents,
13 European patent applications, 37 Japanese patents
and 17 Japanese patent applications. Many of these patents
and patent applications are counterparts of each other. Our
portfolio of licensed patents includes patents or patent
applications with claims directed to the composition of matter,
including both compound and pharmaceutical formulation, or
method of use, or a combination of these claims, for AMITIZA,
SPI-8811 and
SPI-017.
Depending upon the timing, duration and specifics of FDA
approval of the use of a compound for a specific indication,
some of our U.S. patents may be eligible for limited patent
term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, referred to as the Hatch-Waxman Act.

The patent rights relating to AMITIZA licensed by us consist of
seven issued U.S. patents, four issued European patents and
two issued Japanese patents relating to composition of matter
and methods of use. These patent rights also include various
U.S., Europe